AmTrust Financial Services
Amtrust Financial Services, Inc. (Form: 10-Q, Received: 05/10/2017 14:41:31)


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 March 31, 2017
¨
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
_______________________________

AFSIAMTRUSTFINANCIAL.JPG
_______________________________
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
(Do not check if a smaller
reporting company)
 
Smaller Reporting Company o
 
Emerging growth company o
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 May 4, 2017 , the Registrant had one class of Common Stock ($.01 par value), of which 171,237,052 shares were issued and outstanding.







Explanatory Note

As previously disclosed, on March 14, 2017, the Audit Committee of our Board of Directors, in consultation with management and our current and former independent registered public accounting firms, concluded that our previously issued Consolidated Financial Statements for fiscal years 2015 and 2014, along with each of the four quarters included in fiscal year 2015 as well as the first three quarters of fiscal year 2016, needed to be restated.

Accordingly, within this report, we have included restated unaudited quarterly financial statements for the first quarter of 2015 and 2016, which we refer to as the “Restatement.” Our restated consolidated financial statements as of and for the years ended December 31, 2015 and 2014 were included in our Annual Report on Form 10-K for the year ended December 31, 2016. In Note 2. “Restatement of Previously Issued Consolidated Financial Statements,” we have included information regarding the Restatement and specific changes to our previously issued unaudited quarterly financial statements, including details of the adjustments to the previously issued unaudited quarterly financial statements as a result of the Restatement.

Background of the Restatement

The restatement of our unaudited quarterly financial statements and related disclosures primarily relates to the correction of two errors reported in our historical unaudited quarterly financial statements. In accordance with accounting guidance presented in ASC 250-10 and SEC Staff Accounting Bulletin No. 99, Materiality , management assessed the materiality of these errors and concluded that they were material to the Company’s previously issued financial statements. The two primary errors relate to: (1) upfront recognition of the portion of warranty contract revenue associated with administration services, instead of recognizing the revenue over the life of the contract, and (2) bonuses that were expensed in the year paid but that should have been accrued as earned based on ASC 270, Interim Reporting and ASC 450, Contingencies . We also identified other adjustments described in Note 2. “Restatement of Previously Issued Consolidated Financial Statements” that we have corrected as part of this Restatement.

The impact of the Restatement on the Consolidated Statements of Income primarily resulted in decreased service and fee income, increased acquisition costs and other underwriting expenses, increased other expense, decreased interest expense and increased foreign currency loss (three months ended March 31, 2016), increased interest expense and decreased foreign currency gain (three months ended March 31, 2015), which ultimately resulted in decreases to net income in both the three months ended March 31, 2016 and 2015. The impact of the Restatement on the Consolidated Balance Sheets primarily resulted in an increase of premiums receivable (three months ended March 31, 2016 only) and other assets, a reduction of deferred policy acquisition costs and property plant and equipment, an increase in accrued expenses and other liabilities, and a decrease in shareholders’ equity. The impact of the Restatement adjustments on the Consolidated Statements of Cash Flows resulted in an increase of net cash provided by operating activities in the three months ended March 31, 2016 and 2015, an increase of net cash used in investing activities in the three months ended March 31, 2016, a decrease of net cash used in investing activities in the three months ended March 31, 2015, and a decrease in net cash provided by financing activities in the three months ended March 31, 2016 and 2015.

We have not amended our previously filed Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and 2016 affected by the Restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Quarterly Report on Form 10-Q, and the financial statements and related financial information contained in such previously filed reports should no longer be relied upon. We intend to amend our Forms 10-Q for the quarterly periods ended June 30, and September 30, 2016 to reflect the restatement adjustments applicable to the periods presented therein.

Additional information on the Restatement can be found in the following sections of this report:
Item 1. “Financial Statements”, including Note 2. “Restatement of Previously Issued Consolidated Financial Statements”;
Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
Item 4. “Controls and Procedures.”




INDEX
 
 
Page
 
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except number of shares and per share amounts.


3



PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMTRUST FINANCIAL SERVICES, INC.
Consolidated Balance Sheets (unaudited)
(In thousands, except par value)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $7,834,548; $7,315,041)
$
7,937,238

 
$
7,398,134

Fixed maturities, trading, at fair value (amortized cost $57,060; $29,081)
54,153

 
33,782

Equity securities, available-for-sale, at fair value (cost $116,867; $126,670)
128,164

 
137,162

Equity securities, trading, at fair value (cost $98,277; $76,163)
100,258

 
81,960

Equity investment in unconsolidated subsidiaries – related party
157,103

 
151,332

Other investments (related party $77,029; $72,328)
154,541

 
152,187

Total investments
8,531,457

 
7,954,557

Cash and cash equivalents
621,730

 
567,771

Restricted cash and cash equivalents
615,671

 
713,338

Accrued interest and dividends
63,455

 
54,680

Premiums receivable, net
2,946,344

 
2,802,167

Reinsurance recoverable (related party $2,597,647; $2,452,242)
4,509,509

 
4,329,521

Prepaid reinsurance premium (related party $1,213,810; $1,133,485)
2,119,662

 
1,994,092

Other assets (related party $146,760; $161,845; recorded at fair value $397,493; $356,856)
1,747,607

 
1,712,165

Deferred policy acquisition costs
1,026,001

 
928,920

Property and equipment, net
451,573

 
314,332

Goodwill
704,614

 
686,565

Intangible assets
546,648

 
556,560

 
$
23,884,271

 
$
22,614,668

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Loss and loss adjustment expense reserves
$
10,630,162

 
$
10,140,716

Unearned premiums
5,199,465

 
4,880,066

Ceded reinsurance premiums payable (related party $746,729; $633,638)
811,346

 
804,882

Reinsurance payable on paid losses
18,487

 
15,960

Funds held under reinsurance treaties
63,774

 
70,868

Note payable on collateral loan – related party
167,975

 
167,975

Securities sold but not yet purchased, at fair value
61,667

 
36,394

Securities sold under agreements to repurchase, at contract value
293,583

 
160,270

Accrued expenses and other liabilities (recorded at fair value $77,029; $76,840)
1,817,146

 
1,635,666

Debt
1,306,701

 
1,234,900

Total liabilities
20,370,306

 
19,147,697

Commitments and contingencies


 


Redeemable non-controlling interest
1,642

 
1,358

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 500,000 shares authorized; 196,455 issued in 2017 and 2016, respectively; 171,237 and 170,508 outstanding in 2017 and 2016, respectively
1,965

 
1,965

Preferred stock, $0.01 par value; 10,000 shares authorized; 5,399 issued and outstanding; $913,750 aggregated liquidation preference in 2017 and 2016, respectively.
913,750

 
913,750

Additional paid-in capital
1,386,385

 
1,384,922

Treasury stock at cost; 25,218 and 25,947 shares in 2017 and 2016, respectively
(306,435
)
 
(310,883
)
Accumulated other comprehensive loss, net of tax
(97,806
)
 
(125,722
)
Retained earnings
1,398,596

 
1,405,071

Total AmTrust Financial Services, Inc. equity
3,296,455

 
3,269,103

Non-controlling interest
215,868

 
196,510

Total stockholders’ equity
3,512,323

 
3,465,613

 
$
23,884,271

 
$
22,614,668


See accompanying notes to unaudited consolidated financial statements.

4



AMTRUST FINANCIAL SERVICES, INC.
Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
 
 
Three Months Ended March 31,
 
 
 
2017
 
2016
 
 
 
 
 
 As restated
 
Revenues:
 
 

 
 
 
Premium income:
 
 

 
 

 
Net written premium
 
$
1,344,066

 
$
1,220,679

 
Change in unearned premium
 
(121,534
)
 
(146,397
)
 
Net earned premium
 
1,222,532

 
1,074,282

 
 
 
 
 
 
 
Service and fee income (related parties - $20,335; $20,163)
 
137,496

 
128,805

 
Net investment income
 
63,325

 
49,415

 
Net realized gain on investments
 
8,615

 
7,975

 
Total revenues
 
1,431,968

 
1,260,477

 
Expenses:
 
 

 
 

 
Loss and loss adjustment expense
 
840,334

 
715,073

 
Acquisition costs and other underwriting expenses (net of ceding commission and administrative services - related party $153,702; $138,391)
 
328,215

 
272,468

 
Other
 
162,853

 
129,267

 
Total expenses
 
1,331,402

 
1,116,808

 
Income before other income (expense), provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
 
100,566

 
143,669

 
Other income (loss):
 
 

 
 

 
Interest expense (net of interest income - related party - $1,580; $2,188)
 
(23,601
)
 
(15,874
)
 
Gain on investment in life settlement contracts net of profit commission
 
8,610

 
10,730

 
Foreign currency loss
 
(17,968
)
 
(38,233
)
 
Gain on acquisition
 

 
9,678

 
Total other loss
 
(32,959
)
 
(33,699
)
 
Income before provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
 
67,607

 
109,970

 
Provision for income taxes
 
21,356

 
18,960

 
Income before equity in earnings of unconsolidated subsidiaries
 
46,251

 
91,010

 
Equity in earnings of unconsolidated subsidiaries – related parties
 
3,957

 
5,776

 
Net income
 
$
50,208

 
$
96,786

 
Net income attributable to non-controlling interest and redeemable non-controlling interest of subsidiaries
 
(11,005
)
 
(4,017
)
 
Net income attributable to AmTrust Financial Services, Inc.
 
$
39,203

 
$
92,769

 
Dividends on preferred stock
 
(16,571
)
 
(8,791
)
 
Net income attributable to AmTrust common stockholders
 
$
22,632

 
$
83,978

 
Earnings per common share:
 
 

 
 

 
Basic earnings per share
 
$
0.13

 
$
0.48

 
Diluted earnings per share
 
$
0.13

 
$
0.47

 
Dividends declared per common share
 
$
0.17

 
$
0.15

 
Net realized gain on investments:
 
 

 
 

 
Net realized gain on available for sale securities
 
11,630

 
5,272

 
Net unrealized gain (loss) on trading securities and other investments
 
(3,015
)
 
2,703

 
Net realized investment gain
 
$
8,615

 
$
7,975

 
See accompanying notes to unaudited consolidated financial statements.

5



AMTRUST FINANCIAL SERVICES, INC.
Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
As restated

Net income
$
50,208

 
$
96,786

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
13,863

 
(47,194
)
Change in fair value of interest rate swap
92

 
119

Unrealized gain on securities:
 
 
 
Gross unrealized holding gain
32,031

 
127,652

Tax expense arising during period
6,440

 
44,679

Net unrealized holding gain
25,591

 
82,973

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

 

Other net realized (gain) on investments
(11,630
)
 
(428
)
Reclassification adjustments for investment gain (loss) included in net income:
(11,630
)
 
(428
)
Other comprehensive income, net of tax
$
27,916

 
$
35,470

Comprehensive income
78,124

 
132,256

Less: Comprehensive income attributable to redeemable non-controlling interest and non-controlling interest
11,005

 
4,017

Comprehensive income attributable to AmTrust Financial Services, Inc.
$
67,119

 
$
128,239

 
See accompanying notes to unaudited consolidated financial statements.

6



AMTRUST FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
As restated

Cash flows from operating activities:
 

 
 

Net income
$
50,208

 
$
96,786

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

 
 
Depreciation and amortization
40,839

 
27,859

Net amortization of bond premium or discount
5,500

 
4,842

Equity earnings on investment in unconsolidated subsidiaries
(3,957
)
 
(6,145
)
Gain on investment in life settlement contracts, net
(8,610
)
 
(10,730
)
Net realized gain on investments
(8,615
)
 
(7,975
)
Discount on notes payable
1,566

 
1,455

Stock based compensation
5,818

 
5,641

Bad debt expense
11,232

 
305

Foreign currency loss
17,968

 
38,233

Gain on acquisition

 
(9,678
)
Dividend received from equity investment
492

 
369

Changes in assets - (increase) decrease:
 

 
 
Premiums receivables
(285,043
)
 
(271,320
)
Reinsurance recoverable
(177,712
)
 
(73,900
)
Deferred policy acquisition costs
(97,081
)
 
(42,667
)
Prepaid reinsurance premiums
(122,295
)
 
(102,000
)
Other assets
150,741

 
126,208

Changes in liabilities - increase (decrease):
 
 
 
Ceded reinsurance premium payable
6,464

 
203,594

Loss and loss adjustment expense reserve
272,021

 
271,070

Unearned premiums
264,193

 
264,090

Funds held under reinsurance treaties
(7,094
)
 
(30,984
)
Accrued expenses and other liabilities
132,430

 
217,078

Net cash provided by operating activities
249,065

 
702,131

Cash flows from investing activities:
 

 
 

Purchases of fixed maturities, available-for-sale
(871,320
)
 
(870,349
)
Purchases of equity securities, available-for-sale
(41,399
)
 
(613
)
Purchase of equity securities, trading
(170,751
)
 
(54,382
)
Purchase of other investments
(12,210
)
 
(5,441
)
Sales, maturities, paydowns of fixed maturities, available-for-sale
523,448

 
198,173

Sales of equity securities, available-for-sale
119,257

 
4,563

Sales of equity securities, trading
131,845

 
52,744

Sales of other investments
12,690

 
190

Net purchases of short term investments

 
(59,927
)
Net purchases of securities sold but not purchased
25,273

 
(9,763
)
Receipt of life settlement contracts
(15,223
)
 

Receipt of life settlement contract proceeds
18,081

 
8,058

Acquisition of subsidiaries, net of cash obtained
(27,510
)
 
3,814

Decrease in restricted cash and cash equivalents
97,668

 
20,823

Purchase of property and equipment
(156,152
)
 
(41,022
)
Net cash used in investing activities
(366,303
)
 
(753,132
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7



 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
As restated
Cash flows from financing activities:
 

 
 

Repurchase agreements, net
133,313

 

Secured loan agreements borrowings
102,008

 

Secured loan agreements payments
(5,874
)
 
(1,778
)
Promissory note payments
(26,171
)
 

Financing fees
(76
)
 

Common stock issuance

 
276

Common stock repurchase

 
(14,668
)
Preferred stock issuance

 
139,070

Contingent consideration payments

 
(10,303
)
Non-controlling interest capital contributions from consolidated subsidiaries, net
8,638

 

Stock option exercise and other
1,522

 
(2,982
)
Dividends distributed on common stock
(28,987
)
 
(26,311
)
Dividends distributed on preferred stock
(16,571
)
 
(8,791
)
Net cash provided by financing activities
167,802

 
74,513

Effect of exchange rate changes on cash
3,395

 
(4,052
)
Net increase in cash and cash equivalents
53,959

 
19,460

Cash and cash equivalents, beginning of the year
567,771

 
1,003,916

Cash and cash equivalents, end of the period
$
621,730

 
$
1,023,376

Supplemental Cash Flow Information
 

 
 

Income tax payments
$
140

 
$
5,467

Interest payments on debt
$
25,463

 
$
16,295

Declared dividends on common stock
$
29,107

 
$
26,313

 
See accompanying notes to unaudited consolidated financial statements.

8



Notes to 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 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, 2016 , previously filed with the Securities and Exchange Commission (“SEC”) on April 4, 2017.
 
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, 2016 , 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.


9




2. Restatement of Previously Issued Consolidated Financial Statements

In connection with the preparation, review and audit of the Company's consolidated financial statements required to be included in the Annual Report on Form 10-K for the year ended December 31, 2016 , management identified certain errors in the Company's historical financial statements. As a result, the Company concluded that its previously issued consolidated financial statements for fiscal years 2015 and 2014 , along with each of the four quarters included in fiscal year 2015 , as well as the first three quarters of fiscal year 2016 , needed to be restated, The Company's restated consolidated financial statements as of and for the years ended December 31, 2015 and 2014 were included in its Annual Report on Form 10-K for the year ended December 31, 2016 . Within this report, the Company has included restated unaudited interim consolidated financial statements as of and for the three months ended March 31, 2016 and 2015 . This Note 2 to the unaudited interim consolidated financial statements discloses the nature of the restatement matters and adjustments and shows the impact of the restatement for the three months ended March 31, 2016 and 2015, respectively.

The restatement corrects errors primarily related to: (1) upfront recognition of the portion of warranty contract revenue associated with administration services, instead of recognizing the revenue over the life of the contract; and (2) bonuses that were expensed in the year paid but that should have been accrued as earned based on ASC 270, Interim Reporting , and ASC 450, Contingencies . The Company has also identified other adjustments described below in items (3) – (9) that have been corrected as part of this restatement.

Adjustments needed to correct errors

(1)
Warranty fee revenue – During the preparation of its financial statements for the year ended December 31, 2016, management became aware of a misapplication of the revenue recognition guidance in relation to its accounting for warranty contract revenue associated with promotion, marketing and administration services (collectively, "administration services") provided as part of extended service plans (“ESPs”). The Company had historically recognized the majority of revenue related to administration services at the time of the sale of ESP. However, the Company revised its application of the revenue recognition guidance to record revenue related to administration services on a straight-line basis over the term of the ESP contracts. This correction of an error created an overstatement of service and fee income and an overstatement of other expenses that were also recognized upfront at the time of the sale.

(2)
Accrual of bonuses – In prior years, the Company had expensed discretionary bonuses paid to its employees in the year the bonuses were paid because the Company did not consider the discretionary bonuses to be “probable,” which is the standard required for accrual. Upon review of ASC 270, Interim Reporting , and ASC 450, Contingencies , management determined that its application was incorrect because, even though the bonuses were discretionary, the bonuses should have been estimated and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. This created an error resulting in an overstatement of acquisition costs and other underwriting expenses.

(3)
Deferred policy acquisition costs – The Company corrected errors in its calculation of deferred policy acquisition costs related to (a) the over-amortization of certain deferred acquisition costs in 2015, resulting in an overstatement of expenses in 2015, (b) the deferral of certain non-eligible salaries and consulting fees, resulting in an understatement of expenses, (c) the treatment of certain costs as both underwriting expenses and salary and benefit expenses, resulting in the duplication of the amount originally deferred, and (d) the inclusion of deferred warranty administration fees and obligor liabilities associated with the administration services provided to our ESPs, which resulted in an increase to policy acquisition expense.

(4)
Foreign exchange gain/(loss) – The Company corrected errors related to the re-measurement of monetary balances denominated in foreign currencies into their functional currencies that were originally recorded as a component of other comprehensive income. Given the monetary nature of some of these balances, the re-measurement impact should have been recorded as foreign currency transaction gain/(loss) in the Company's statements of income.

(5)
Capitalized software – The Company capitalized certain internally developed software costs that did not meet criteria for capitalization under ASC 350, Intangibles - Goodwill and Other . This error resulted overall in an over-capitalization of certain software expenses, which resulted in an understatement of expenses for the three months ended March 31, 2016 and an overstatement of expenses for the three months ended March 31, 2015.


10



(6)
Imputed interest – The Company corrected an error related to imputed interest on contingent consideration owed as a result of certain business acquisitions, which resulted in an overstatement of interest expense during the three months ended March 31, 2016 and an understatement of interest expense during the three months ended March 31 2015 .

(7)
Intercompany eliminations – The Company corrected an error related to internal brokerage commissions paid from one of its subsidiaries to another subsidiary, which should have been eliminated in consolidation, thereby causing an overstatement of commission income in the three months ended March 31, 2015.

(8)
Other items – The Company corrected other errors that impacted the three months ended March 31, 2016 and 2015 interim consolidated financial statements, including unaccrued liabilities, uncollectible other receivables, accrued commissions, unrecognized amortization expense, unrealized losses on investments and proper quarter end cut-off related to premiums and claims.

(9)
Balance sheet items – The Company historically recorded certain receivables (premium and other) net of commissions. The error was corrected and the Company now records the receivables on a gross basis, with the associated commission payable in other accrued expenses and liabilities. In addition, the Company corrected a classification error involving short term investments and cash and cash equivalents as of March 31, 2016 and 2015 .

The following summarizes the impact of the Restatement on our previously reported unaudited interim Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Stockholders' Equity and Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 :

11





 
Consolidated Balance Sheet
 
March 31, 2016
ASSETS
As previously reported
 
Adjustments
 
As restated
 
Reference
 
(in thousands)
 
 
Investments:
  

 
 

 
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $6,221,739)
$
6,307,719

 
$

 
$
6,307,719

 
 
Equity securities, available-for-sale, at fair value (cost $110,594)
98,518

 

 
98,518

 
 
Equity securities, trading, at fair value (cost $28,142)
29,891

 

 
29,891

 
 
Short-term investments
34,008

 
(25,094
)
 
8,914

 
9

Equity investment in unconsolidated subsidiaries – related parties
146,000

 

 
146,000

 
 
Other investments (related party $68,860)
126,875

 

 
126,875

 
 
Total investments
6,743,011

 
(25,094
)
 
6,717,917

 
 
Cash and cash equivalents
998,282

 
25,094

 
1,023,376

 
8, 9

Restricted cash and cash equivalents
359,876

 

 
359,876

 
 
Accrued interest and dividends
57,179

 

 
57,179

 
 
Premiums receivable, net
2,376,689

 
134,804

 
2,511,493

 
8, 9

Reinsurance recoverable (related party $2,282,432)
3,097,192

 

 
3,097,192

 
 
Prepaid reinsurance premiums (related party $1,184,742)
1,633,866

 

 
1,633,866

 
 
Other assets (related party $206,298; recorded at fair value $294,573)
1,247,886

 
74,017

 
1,321,903

 
1 – 9

Deferred policy acquisition costs
761,802

 
(25,495
)
 
736,307

 
3

Property and equipment, net
292,381

 
(11,448
)
 
280,933

 
5, 8

Goodwill
426,268

 

 
426,268

 
 
Intangible assets
361,289

 

 
361,289

 
 
  
$
18,355,721

 
$
171,878

 
$
18,527,599

 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Loss and loss adjustment expense reserves
$
7,516,089

 
$

 
$
7,516,089

 
 
Unearned premiums
4,290,528

 

 
4,290,528

 
 
Ceded reinsurance premiums payable (related party $571,754)
851,192

 

 
851,192

 
 
Accrued expenses and other liabilities (related party $167,975; recorded at fair value $101,655)
1,379,985

 
370,853

 
1,750,838

 
1, 2, 6, 8, 9

Debt (net of debt issuance cost of $16,616)
993,028

 

 
993,028

 
 
Total liabilities
15,030,822

 
370,853

 
15,401,675

 
 
Commitments and contingencies
 
 
 
 
 
 
 
Redeemable non-controlling interest
1,332

 

 
1,332

 
 
Stockholders’ equity:
 
 
 
 
 
 
 
Common stock, $0.01 par value; 500,000 shares authorized, 196,455 issued; 175,400 outstanding
1,965

 

 
1,965

 
 
Preferred stock, $0.01 par value; 10,000 shares authorized, 5,112 issued and outstanding; aggregated liquidation preference $626,250
626,250

 

 
626,250

 
 
Additional paid-in capital
1,381,282

 

 
1,381,282

 
 
Treasury stock at cost; 21,054 shares
(177,071
)
 

 
(177,071
)
 
 
Accumulated other comprehensive (loss) income, net of tax
(97,348
)
 
(574
)
 
(97,922
)
 
4

Retained earnings
1,408,177

 
(198,401
)
 
1,209,776

 
1 – 8

Total AmTrust Financial Services, Inc. equity
3,143,255

 
(198,975
)
 
2,944,280

 
 
Non-controlling interest
180,312

 

 
180,312

 
 
Total stockholders’ equity
3,323,567

 
(198,975
)
 
3,124,592

 
 
  
$
18,355,721

 
$
171,878

 
$
18,527,599

 
 






12



 
Consolidated Statement of Income
 
Three Months Ended March 31, 2016
 
As previously reported
 
Adjustments
 
As restated
 
Reference
 
(in thousands, except per share)
 
 
Revenues:
  

 
  

 
 
 
 
Premium income:
 
 
 
 
 
 
 
Net written premium
$
1,220,679

 
$

 
$
1,220,679

 
 
Change in unearned premium
(146,397
)
 

 
(146,397
)
 
 
Net earned premium
1,074,282

 

 
1,074,282

 
 
Service and fee income (related parties - $20,163)
144,201

 
(15,396
)
 
128,805

 
1, 8

Net investment income
49,415

 

 
49,415

 
 
Net realized gain on investments
7,975

 

 
7,975

 
 
Total revenues
1,275,873

 
(15,396
)
 
1,260,477

 
 
Expenses:
  

 
 
 
 
 
 
Loss and loss adjustment expense
715,073

 

 
715,073

 
 
Acquisition costs and other underwriting expenses (net of ceding commission - related party - $138,391)
264,634

 
7,834

 
272,468

 
2, 3, 5, 8

Other
128,186

 
1,081

 
129,267

 
1, 5, 8

Total expenses
1,107,893


8,915

 
1,116,808

 
 
Income before other (expense) income, provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
167,980

 
(24,311
)
1

143,669

 
 
Other (expenses) income:
  

 
 
 
 
 
 
Interest expense (net of interest income - related party - $2,188)
(17,700
)
 
1,826

 
(15,874
)
 
6

Gain on investment in life settlement contracts net of profit commission
10,730

 

 
10,730

 
 
Foreign currency (loss) gain
(35,673
)
 
(2,560
)
 
(38,233
)
 
4, 8

Gain on acquisition
9,678

 

 
9,678

 
 
Total other (expenses) income
(32,965
)

(734
)
 
(33,699
)
 
 
Income before provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
135,015


(25,045
)
 
109,970

 
 
Provision for income taxes
27,726

 
(8,766
)
 
18,960

 
1 – 8

Income before equity in earnings of unconsolidated subsidiaries
107,289


(16,279
)
 
91,010

 
 
Equity in earnings of unconsolidated subsidiary – related parties
5,776

 

 
5,776

 
 
Net income
$
113,065


$
(16,279
)
 
$
96,786

 
 
Net income attributable to non-controlling interests and redeemable non-controlling interests of subsidiaries
(4,017
)
 

 
(4,017
)
 
 
Net income attributable to AmTrust Financial Services, Inc.
$
109,048


$
(16,279
)
 
$
92,769

 
 
Dividends on preferred stock
(8,791
)
 

 
(8,791
)
 
 
Net income attributable to AmTrust common stockholders
$
100,257

0.001

$
(16,279
)
2

$
83,978

 
 
Earnings per common share:
  

 
 
 
 
 
 
Basic earnings per share
$
0.57

 
$
(0.09
)
 
$
0.48

 
 
Diluted earnings per share
$
0.56

 
$
(0.09
)
 
$
0.47

 
 
Dividends declared per common share
$
0.15

 
$

 
$
0.15

 
 
Weighted average common shares outstanding - basic
175,585

165,042


 
175,585

 
 
Weighted average common shares outstanding - diluted
177,927

168,360


 
177,927

 
 



13



 
 
Consolidated Statement of Comprehensive Income
 
 
Three Months Ended March 31, 2016
 
 
As previously reported
 
Adjustments
 
As Restated
 
Reference
 
 
 
(in thousands)
 
 
 
 
Net income
 
$
113,065

 
$
(16,279
)
 
$
96,786

 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(47,845
)
 
651

 
(47,194
)
 
4

Change in fair value of interest rate swap
 
119

 

 
119

 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
 
Gross unrealized holding (loss) gain
 
124,720

 
2,932

 
127,652

 
8

Less tax expense
 
43,652

 
1,027

 
44,679

 
8

Net unrealized holding gain
 
81,068

 
1,905

 
82,973

3

 
Reclassification adjustment for investment loss included in net income, net of tax:
 
 
 
 
 
 
 
 
Other-than-temporary impairment loss
 

 

 

 
 
Other net realized loss on investments
 
(428
)
 

 
(428
)
 
 
Reclassification adjustment for investment loss included in net income
 
(428
)
 

 
(428
)
 
 
Other comprehensive income, net of tax
 
$
32,914

 
$
2,556

 
$
35,470

 
 
Comprehensive income
 
145,979

 
(13,723
)
 
132,256

 
 
Less: Comprehensive income attributable to non-controlling and redeemable non-controlling interest
 
4,017

 

 
4,017

 
 
Comprehensive income attributable to AmTrust Financial Services, Inc.
 
$
141,962

 
$
(13,723
)
 
$
128,239

 
 

 
Consolidated Statement of Stockholders' Equity
 
As of March 31, 2016
 
As previously reported
 
Adjustment
 
As Restated
 
Reference
 
 
(in thousands)
 
 
 
 
Common stock
$
1,965

 
$

 
$
1,965

 
 
Preferred stock
626,250

 

 
626,250

 
 
Additional paid-in capital
1,381,282

 

 
1,381,282

 
 
Treasury stock
(177,071
)
 

 
(177,071
)
 
 
Accumulated other comprehensive income (loss)
(97,348
)
 
(574
)
 
(97,922
)
 
4, 8
Retained earnings
1,408,177

 
(198,401
)
 
1,209,776

 
1 – 8
 
$
3,143,255

 
$
(198,975
)
 
$
2,944,280

 
 

14



 
Consolidated Statements of Cash Flows
 
Three Months Ended March 31, 2016
  
As previously reported
 
Adjustments
 
As restated
 
Reference
 
(in thousands)
 
 
Cash flows from operating activities:
  

 
  

 
 
 
 
Net income
$
113,065

 
$
(16,279
)
 
$
96,786

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

 
 
 
 
 
 
Depreciation and amortization
25,347

 
2,512

 
27,859

 
5

Net amortization of bond premium or discount
4,842

 

 
4,842

 
 
Equity earnings on investment in unconsolidated subsidiaries
(5,776
)
 
(369
)
 
(6,145
)
 
8

Gain on investment in life settlement contracts, net
(10,730
)
 

 
(10,730
)
 
 
Net realized gain on investments
(7,975
)
 

 
(7,975
)
 
 
Discount on notes payable
1,455

 

 
1,455

 
 
Stock based compensation
5,641

 

 
5,641

 
 
Bad debt expense
305

 

 
305

 
 
Foreign currency loss
35,673

 
2,560

 
38,233

 
4, 8

Gain on acquisition
(9,678
)
 

 
(9,678
)
 
 
      Dividend received from equity investment

 
369

 
369

 
8

Changes in assets – (increase) decrease:
 
 
 
 
 
 
 
Premiums receivable
(256,816
)
 
(14,504
)
 
(271,320
)
 
8, 9

Reinsurance recoverable
(72,607
)
 
(1,293
)
 
(73,900
)
 
8

Deferred policy acquisition costs
(57,559
)
 
14,892

 
(42,667
)
 
3

Prepaid reinsurance premiums
(102,000
)
 

 
(102,000
)
 
 
Other assets
124,952

 
1,256

 
126,208

 
1 – 9

Changes in liabilities – increase (decrease):
 
 
 
 
 
 
 
Ceded reinsurance premium payable
203,594

 

 
203,594

 
 
Loss and loss expense adjustment reserves
271,070

 

 
271,070

 
 
Unearned premiums
263,749

 
341

 
264,090

 
8

Funds held under reinsurance treaties
(30,984
)
 

 
(30,984
)
 
 
Accrued expenses and other liabilities
192,883

 
24,195

 
217,078

 
1, 2, 6, 8, 9

Net cash provided by operating activities
688,451

 
13,680

 
702,131

 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of fixed maturities, available-for-sale
(870,349
)
 

 
(870,349
)
 
 
Purchases of equity securities, available-for-sale
(613
)
 

 
(613
)
 
 
Purchases of equity securities, trading
(54,382
)
 

 
(54,382
)
 
 
Purchases of other investments
(12,605
)
 
7,164

 
(5,441
)
 
8

Sales, maturities, paydowns of fixed maturities, available-for-sale
198,173

 

 
198,173

 
 
Sales of equity securities, available-for-sale
4,563

 

 
4,563

 
 
Sales of equity securities, trading
52,744

 

 
52,744

 
 
Sales of other investments
190

 

 
190

 
 
Net (purchases) of short term investments
(17,926
)
 
(42,001
)
 
(59,927
)
 
9

Net (purchases) of securities sold but not purchased
(9,763
)
 

 
(9,763
)
 
 
Receipt of life settlement contract proceeds
8,058

 

 
8,058

 
 
Acquisition of subsidiaries, net of cash obtained
3,814

 

 
3,814

 
 
Decrease in restricted cash and cash equivalents, net
20,823

 

 
20,823

 
 
Purchase of property and equipment
(25,630
)
 
(15,392
)
 
(41,022
)
 
5

Net cash used in investing activities
(702,903
)
 
(50,229
)
 
(753,132
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15



 
Consolidated Statements of Cash Flows
 
Three Months Ended March 31, 2016
  
As previously reported
 
Adjustments
 
As restated
 
Reference
Cash flows from financing activities:
 
 
 
 
 
 
 
Secured loan agreement payments
(1,778
)
 

 
(1,778
)
 
 
Common stock issuance
276

 

 
276

 
 
Common stock repurchase
(14,668
)
 

 
(14,668
)
 
 
Preferred stock issuance
139,070

 

 
139,070

 
 
Contingent consideration payments

 
(10,303
)
 
(10,303
)
 
6

Stock option exercise and other
(2,982
)
 

 
(2,982
)
 
 
Dividends distributed on common stock
(26,311
)
 

 
(26,311
)
 
 
Dividends distributed on preferred stock
(8,791
)
 

 
(8,791
)
 
 
Net cash provided by financing activities
84,816

 
(10,303
)
 
74,513

 
 
Effect of exchange rate changes on cash
(4,052
)
 

 
(4,052
)
 
 
Net increase in cash and cash equivalents
66,312

 
(46,852
)
 
19,460

 
 
Cash and cash equivalents, beginning of year
931,970

 
71,946

 
1,003,916

 
1, 2, 4-9

Cash and cash equivalents, end of period
$
998,282

 
$
25,094

 
$
1,023,376

 
 
Supplemental Cash Flow Information
  

 
 
 
 
 
 
Interest payments on debt
$
16,295

 

 
$
16,295

 
 
Income tax payments
5,467

 

 
5,467

 
 
Declared dividends on common stock
26,313

 

 
26,313

 
 

16



 
Consolidated Balance Sheet
 
March 31, 2015
ASSETS
As previously reported
 
Adjustments
 
As restated
 
Reference
 
(in thousands)
 
 
Investments:
  

 
 

 
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $4,292,658)
$
4,419,313

 
$

 
$
4,419,313

 
 
Equity securities, available-for-sale, at fair value (cost $96,261)
94,668

 

 
94,668

 
 
Equity securities, trading, at fair value (cost $29,353)
30,560

 

 
30,560

 
 
Short-term investments
42,668

 
(32,001
)
 
10,667

 
9

Equity investment in unconsolidated subsidiaries – related parties
125,104

 

 
125,104

 
 
Other investments (related party $9,700)
45,627

 

 
45,627

 
 
Total investments
4,757,940

 
(32,001
)
 
4,725,939

 
 
Cash and cash equivalents
997,007

 
32,001

 
1,029,008

 
8, 9

Restricted cash and cash equivalents
217,628

 

 
217,628

 
 
Accrued interest and dividends
42,952

 

 
42,952

 
 
Premiums receivable, net
2,134,647

 
83,918

 
2,218,565

 
8, 9

Reinsurance recoverable (related party $1,627,100)
2,544,549

 

 
2,544,549

 


Prepaid reinsurance premium (related party $1,047,486)
1,473,353

 

 
1,473,353

 
 
Other assets (related party $156,996; recorded at fair value $259,785)
1,050,804

 
421

 
1,051,225

 
1, 5, 8, 9

Deferred policy acquisition costs
651,884

 
(2,651
)
 
649,233

 
3

Property and equipment, net
167,459

 
(8,876
)
 
158,583

 
5, 8

Goodwill
458,042

 

 
458,042

 
 
Intangible assets
303,116

 

 
303,116

 
 
  
$
14,799,381

 
$
72,812

 
$
14,872,193

 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Loss and loss adjustment expense reserves
$
5,886,149

 
$

 
5,886,149

 
 
Unearned premiums
3,704,419

 

 
3,704,419

 


Ceded reinsurance premiums payable (related party $533,234)
772,651

 

 
772,651

 
 
Accrued expenses and other liabilities (related party $167,975; recorded at fair value $33,189)
1,229,501

 
210,049

 
1,439,550

 
1, 2, 6, 8, 9

Debt (net of debt issuance cost of $12,295)
580,673

 

 
580,673

 
 
Total liabilities
12,173,393

 
210,049

 
12,383,442

 
 
Commitments and contingencies
 
 
 
 
 
 
 
Redeemable non-controlling interest
922

 

 
922

 
 
Stockholders’ equity:
 
 
 
 
 
 
 
Common stock, $0.01 par value; 300,000 shares authorized, 196,436 issued; 164,694 outstanding
1,964

 

 
1,964

 
 
Preferred stock, $0.01 par value; 10,000 shares authorized, 4,968 issued and outstanding
482,500

 

 
482,500

 
 
Additional paid-in capital
1,116,900

 

 
1,116,900

 
 
Treasury stock at cost; 31,562 shares
(225,121
)
 

 
(225,121
)
 
 
Accumulated other comprehensive income (loss)
(2,348
)
 
13,202

 
10,854

 
4, 8

Retained earnings
1,088,840

 
(150,439
)
 
938,401

 
1, 2, 4, 5, 8

Total AmTrust Financial Services, Inc. equity
2,462,735

 
(137,237
)
 
2,325,498

 
 
Non-controlling interest
162,331

 

 
162,331

 
 
Total stockholders’ equity
2,625,066

 
(137,237
)
 
2,487,829

 
 
  
$
14,799,381

 
$
72,812

 
$
14,872,193

 
 











17



 
Consolidated Statement of Income
 
Three Months Ended March 31, 2015
 
As previously reported
 
Adjustments
 
As restated
 
Reference
 
(in thousands, except share data)
 
 
Revenues:
 
 
 
Premium income:
 
 
 
 
 
 
 
Net written premium
$
1,043,189

 
$

 
$
1,043,189

 
 
Change in unearned premium
(93,812
)
 

 
(93,812
)
 
 
Net earned premium
949,377

 

 
949,377

 
 
 
 
 
 
 
 
 
 
Service and fee income (related parties - $17,404)
112,886

 
(10,767
)
 
102,119

 
1

Net investment income
34,573

 

 
34,573

 


Net realized gain on investments
15,653

 

 
15,653

 
 
Total revenues
1,112,489

 
(10,767
)
 
1,101,722

3,000

 
Expenses:
 
 
 
 
 
3,000

 
Loss and loss adjustment expense
613,283