Unassociated 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 March 31, 2010
 
o 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. 001-34042
 
MAIDEN HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)

Bermuda
(State or other jurisdiction of
incorporation or organization)
98-0570192
(IRS Employer
Identification No.)
   
131 Front Street, Hamilton, Bermuda
(Address of principal executive offices)
HM12
(Zip Code)
   
(441) 292-7090
(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 o
 
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  o No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer ý
   
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No x
 
As of May 7, 2010, the Registrant had one class of Common Stock ($.01 par value),
of which 70,291,289 shares were issued and outstanding.
 


INDEX
 
   
Page
PART I - Financial Information
   
     
Item 1. Financial Statements
 
3
     
Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009
 
3
     
Condensed Consolidated Statement of Income for the three months ended March 31, 2010 and 2009 (unaudited)
 
4
     
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2010 and 2009 (unaudited)
 
5
     
Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)
 
6
     
Notes to Condensed Consolidated Financial Statements
 
7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
41
     
Item 4. Controls and Procedures
 
42
     
PART II - Other Information
   
     
Item 5. Other Information – Submission of Matters to a Vote of Security Holders
 
43
     
Item 6. Exhibits
 
44
     
Signatures
 
45

2


PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
         
   
March 31, 2010
(Unaudited)
   
December 31, 2009
(Audited)
 
ASSETS
   
  
     
  
 
Investments:
   
  
     
  
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2010: $1,669,433; 2009: $1,623,382)
 
$
1,726,472
   
$
1,661,692
 
Other investments, at fair value (Cost 2010: $ 5,681; 2009:$5,684)
   
5,601
     
5,549
 
Total investments
   
1,732,073
     
1,667,241
 
Cash and cash equivalents
   
62,743
     
107,396
 
Restricted cash and cash equivalents
   
117,639
     
144,944
 
Accrued investment income
   
12,582
     
11,405
 
Reinsurance balances receivable (includes $87,326 and $43,382 from related party in 2010 and 2009, respectively)
   
299,237
     
208,495
 
Prepaid reinsurance
   
26,268
     
28,752
 
Reinsurance recoverable on unpaid losses
   
16,464
     
11,984
 
Loan to related party
   
167,975
     
167,975
 
Deferred commission and other acquisition costs (includes $95,244 and $85,979 from related party in 2010 and 2009, respectively)
   
178,254
     
172,983
 
Other assets
   
12,464
     
11,818
 
Intangible assets, net
   
49,832
     
51,284
 
Goodwill
   
52,617
     
52,617
 
Total assets
 
$
2,728,148
   
$
2,636,894
 
LIABILITIES
   
  
     
  
 
Reserve for loss and loss adjustment expenses (includes $195,683 and $174,046 from related party in 2010 and 2009, respectively)
 
$
1,048,930
   
$
1,006,320
 
Unearned premiums (includes $292,030 and $264,751 from related party in 2010 and 2009, respectively)
   
629,940
     
583,478
 
Accrued expenses and other liabilities
   
47,864
     
60,044
 
Securities sold under agreements to repurchase, at contract value
   
76,324
     
95,401
 
Junior subordinated debt
   
215,140
     
215,125
 
Total liabilities
   
2,018,198
     
1,960,368
 
Commitments and Contingencies
           
  
 
Shareholders’ equity
           
  
 
Common shares ($0.01 par value;71,254,093 and 71,253,625 shares issued in 2010 and 2009, respectively;70,291,757 and 70,291,289 shares outstanding in 2010 and 2009, respectively)
   
713
     
713
 
Additional paid-in capital
   
576,298
     
576,086
 
Accumulated other comprehensive income
   
56,959
     
32,747
 
Retained earnings
   
79,781
     
70,781
 
Treasury shares, at cost (2010 and 2009: 962,336 shares)
   
(3,801
   
(3,801
Total shareholders’ equity
   
709,950
     
676,526
 
Total liabilities and shareholders’ equity
 
$
2,728,148
   
$
2,636,894
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
3


MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In Thousands of United States Dollars, Except Per Share Data)
(Unaudited)
 
   
For the
Three Months
Ended
March 31, 2010
   
For the
Three Months
Ended
March 31, 2009
 
Revenues:
           
Gross premiums written
  $ 327,382     $ 336,548  
Net premiums written
    311,291       336,548  
Change in unearned premiums
    (47,362 )     (126,456 )
Net earned premium
    263,929       210,092  
Net investment income
    17,581       14,259  
Net realized investment gains (losses)
    312       (1,930 )
Total revenues
    281,822       222,421  
Expenses:
               
Loss and loss adjustment expenses
    170,285       146,288  
Commission and other acquisition expenses
    77,396       46,631  
Other operating expenses
    8,552       7,535  
Subordinated debt interest expense
    9,115       7,090  
Amortization of intangible assets
    1,452       1,564  
Foreign exchange loss
    1,153       213  
Total expenses
    267,953       209,321  
Income before income taxes 
    13,869       13,100  
Income taxes:
               
Current tax expense
           
Deferred tax expense
    300        
Income tax expense
    300        
Net income
  $ 13,569     $ 13,100  
                 
Basic and diluted earnings per common share
  $ 0.19     $ 0.19  
                 
Dividends declared per common share
  $ 0.065     $ 0.06  
 
   
For the Three
Months Ended
March 31,
2010
   
For the Three
Months Ended
March 31,
2009
 
Net realized investment gains (losses):
           
Total other-than-temporary impairment losses
 
$
   
$
 
Portion of loss recognized in other comprehensive income
   
     
 
Net impairment losses recognized in earnings
   
     
 
Other net realized gain (loss) on investments
   
312
     
(1,930
)
Net realized investment gains (losses)
 
$
312
   
$
(1,930
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
4


MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In Thousands of United States Dollars)
(Unaudited)
 
   
For the
Three Months
Ended
March 31, 2010
   
For the
Three Months
Ended
March 31, 2009
 
Common shares
 
 
   
 
 
Balance – beginning of period
  $ 713     $ 596  
Exercise of options and issuance of shares, net
          117  
Balance – end of period
    713       713  
Additional paid-in capital
               
Balance – beginning of period
    576,086       530,519  
Exercise of options and issuance of shares, net
    2       44,928  
Share based compensation
    210       159  
Balance – end of period
    576,298       575,606  
Accumulated other comprehensive income (loss)
               
Balance – beginning of period
    32,747       (44,499 )
Net unrealized gains (losses) on securities
    24,212       (16,486
Balance – end of period
    56,959       (60,985
Retained earnings
               
Balance – beginning of period
    70,781       26,944  
Net income
    13,569       13,100  
Dividends on common shares
    (4,569     (4,217
Balance – end of period
    79,781       35,827  
Treasury shares
               
Balance – beginning of period
    (3,801     (3,801
Shares repurchased
           
Balance – end of period
    (3,801     (3,801
Total Shareholders’ Equity
  $ 709,950     $ 547,360  
Comprehensive income (loss)
               
Net income
  $ 13,569     $ 13,100  
Other comprehensive income (loss)
    24,212       (16,486
Comprehensive income (loss)
  $ 37,781     $ (3,386 )
                 
Disclosure regarding net unrealized gains (losses)
               
Unrealized holding gains (losses) during the period
  $ 24,524     $ (18,416 )
Adjustment for reclassification of realized (gains) losses and other-than-temporary losses recognized in net income
    (312     1,930  
Net unrealized gains (losses) on securities
  $ 24,212     $ (16,486 )
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
5


MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of United States Dollars)
(Unaudited)
   
For the
Three Months
Ended
March 31, 2010
   
For the
Three Months
Ended
March 31, 2009
 
Cash flows from operating activities:
       
Net income
  $ 13,569     $ 13,100  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation and amortization of intangibles
    1,749       1,636  
Net realized (gain) loss on sales of investments
    (312 )     1,930  
Foreign exchange loss on revaluation
    1,153       213  
Amortization of share-based compensation expense, bond premium and discount and subordinated debt discount
    (1,334 )     (927 )
Changes in assets - (increase) decrease:
               
Reinsurance balances receivable
    (87,416 )     (110,157 )
Prepaid reinsurance
    2,484        
Accrued investment income
    (1,177 )     840  
Deferred commission and other acquisition costs
    (5,271 )     (48,146 )
Other assets
    (270 )     (40 )
Changes in liabilities – increase (decrease):
               
Loss and loss adjustment expenses, net
    38,252       28,160  
Unearned premiums
    46,462       126,457  
Accrued expenses and other liabilities
    (10,717 )     1,763  
Net cash (used in) provided by operating activities
    (2,828 )     14,829  
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities
    (205,443 )     (222,323 )
Purchases of other investments
          (138 )
Sale of investments:
               
Proceeds from sales of fixed-maturity securities
    37,737       85,769  
Proceeds from maturities and calls of fixed-maturity securities
    123,558       19,423  
Proceeds from redemption of other investments
    3       22  
Decrease in restricted cash and cash equivalents
    27,305       46,694  
Purchase of capital assets
    (673 )     (381 )
Net cash used in investing activities
    (17,513 )     (70,934 )
Cash flows from financing activities:
               
Repurchase agreements, net
    (19,077 )     (232,646 )
Common share issuance
    2       117  
Junior subordinated debt issuance
          260,000  
Junior subordinated debt issuance cost
          (4,342 )
Dividend paid
    (4,569 )     (3,515 )
Net cash (used in) provided by financing activities
    (23,644 )     19,614  
Effect of exchange rate changes on foreign currency cash
    (668 )     (213 )
Net decrease in cash and cash equivalents
    (44,653 )     (36,704 )
Cash and cash equivalents, beginning of period
    107,396       131,897  
Cash and cash equivalents, end of period
  $ 62,743     $ 95,193  
Supplemental information about non-cash investing and financing activities
               
Discount on junior subordinated debt
  $     $ (44,928 )
Additional paid in Capital
          44,928  
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
6

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
1.      Basis of Presentation — Summary of Significant Accounting Policies
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Maiden Holdings, Ltd. and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.
 
These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
Certain reclassifications have been made for 2009 to conform to the 2010 presentation and have no impact on net income previously reported.
 
2.      Recent Accounting Pronouncements
 
Adoption of new accounting pronouncements  
 
On June 12, 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of Financial Assets,” an amendment of FASB Statement 140 and the FASB subsequently codified it as Accounting Standard Update (“ASU”) 2009-16, updating Accounting Standards Codification (“ASC”) Topic 860 “Transfers and Servicing” and it requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of financial assets accounted for as a sale. It is a revision to FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009 and interim periods within those fiscal years. The adoption of ASU 2009-16 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
On June 12, 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” and the FASB subsequently codified as ASU 2009-17, updating ASC Topic 810 “Consolidation” and it requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It determines whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009, and interim periods within those fiscal years. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
New accounting pronouncements issued during 2010 impacting the Company are as follows:  
 
In February 2010, the FASB issued ASU 2010-09, which requires SEC filers to evaluate subsequent events through the date the financial statements are issued. It exempts SEC filers from disclosing the date through which subsequent events have been evaluated.
 
7

 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
2.      Recent Accounting Pronouncements (continued)
 
On January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 amends ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), to require a number of additional disclosures regarding fair value measurements.  ASU 2010-06 specifically requires the disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for the transfers, the reasons for any transfers in or out of Level 3 and the disclosure of information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlement on a gross basis.  ASU 2010-06 also amends ASC 820 to clarify that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities.  ASU 2010-06 also clarified the requirement for entities to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.  The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
3.      Investments
 
(a)           Fixed Maturities and Other Investments
 
The original or amortized cost, estimated fair value and gross unrealized gains and losses of available-for-sale fixed maturities and other investments as of March 31, 2010 and December 31, 2009 are as follows:
 
March 31, 2010
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed Maturities:
 
 
   
 
   
 
   
 
 
U.S. treasury bonds
  $ 39,228     $ 211     $ (180 )   $ 39,259  
U.S. agency bonds – mortgage and asset-backed
    814,465       21,396       (937 )     834,924  
U.S. agency bonds – other
    189,913       4,818       (1 )     194,730  
Corporate fixed maturities
    604,449       42,920       (12,069 )     635,300  
Municipal bonds
    21,378       881             22,259  
Total available for sale fixed maturities
    1,669,433       70,226       (13,187 )     1,726,472  
Other investments
    5,681             (80 )     5,601  
Total investments
  $ 1,675,114     $ 70,226     $ (13,267 )   $ 1,732,073  
 
December 31, 2009
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed Maturities:
 
 
   
 
   
 
   
 
 
U.S. treasury bonds
  $ 39,297     $ 224     $ (283 )   $ 39,238  
U.S. agency bonds – mortgage and asset-backed
    779,400       17,504       (2,321 )     794,583  
U.S. agency bonds – other
    217,192       4,772       (447 )     221,517  
Corporate fixed maturities
    564,750       37,985       (20,071 )     582,664  
Municipal bonds
    22,743       947             23,690  
Total available for sale fixed maturities
    1,623,382       61,432       (23,122 )     1,661,692  
Other investments
    5,684             (135 )     5,549  
Total investments
  $ 1,629,066     $ 61,432     $ (23,257 )   $ 1,667,241  
 
The contractual maturities of our fixed maturities as of March 31, 2010 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment.
 
8

 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.      Investments (continued)
 
As at March 31, 2010
 
Amortized Cost
   
Fair
Value
   
% of Total
Fair Value
 
Maturity
   
  
     
  
     
  
 
Due in one year or less
 
$
168,341
   
$
171,972
     
9.96
%
Due after one year through five years
   
181,342
     
187,816
     
10.88
%
Due after five years through ten years
   
415,670
     
433,300
     
25.10
%
Due after ten years
   
89,615
     
98,460
     
5.70
%
  
   
854,968
     
891,548
     
51.64
%
Mortgage and asset-backed securities
   
814,465
     
834,924
     
48.36
%
Total
 
$
1,669,433
   
$
1,726,472
     
100.00
%
 
The following tables summarize fixed maturities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
March 31, 2010
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
   
 
   
 
 
U.S. treasury bonds
  $ 7,615     $ (180 )   $     $     $ 7,615     $ (180 )
U.S. agency bonds – mortgage and asset backed
    181,777       (931 )     31,417       (6 )     213,194       (937 )
U.S. agency bonds - other
    2,004       (1 )                 2,004       (1 )
Corporate fixed maturities
    40,527       (621 )     192,120       (11,448 )     331,851       (12,069 )
  
  $ 231,923     $ (1,733 )   $ 223,537     $ (11,454 )   $ 455,460     $ (13,187 )
Other investments
  $     $     $ 4,919     $ (80 )   $ 4,919     $ (80 )
Total temporarily impaired available-for-sale securities and other investments
  $ 231,923     $ (1,733 )   $ 228,456     $ (11,534 )   $ 460,379     $ (13,267 )
 
As of March 31, 2010, there were approximately 32 securities in an unrealized loss position with a fair value of $460,379 and unrealized losses of $13,267. Of these securities, there are 14 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $228,456 and unrealized losses of $11,534.
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
December 31, 2009
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
 
 
   
 
   
 
   
 
   
 
   
 
 
U.S. treasury bonds
  $ 8,632     $ (283 )   $     $     $ 8,632     $ (283 )
U.S. agency bonds – mortgage and asset-backed
    235,013       (2,319 )     694       (2 )     235,707       (2,321 )
U.S. agency bonds – other
    59,511       (447 )                 59,511       (447 )
Corporate fixed maturities
    11,687       (619 )     193,676       (19,452 )     205,363       (20,071 )
  
  $ 314,843     $ (3,668 )   $ 194,370     $ (19,454 )   $ 509,213     $ (23,122 )
Other investments
  $     $     $ 4,864     $ (135 )   $ 4,864     $ (135 )
Total temporarily impaired available-for-sale securities and other investments
  $ 314,843     $ (3,668 )   $ 199,234     $ (19,589 )   $ 514,077     $ (23,257 )
 
As of December 31, 2009, there were approximately 34 securities in an unrealized loss position with a fair value of $514,077 and unrealized losses of $23,257. Of these securities, there are 14 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $199,234 and unrealized losses of $19,589.
 
 
9

 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.      Investments (continued)
 
Other-than-Temporary Impairments (“OTTI”)
 
We review our investment portfolio for impairment on a quarterly basis. Impairment of investments results in a charge to operations when a fair value decline below cost is deemed to be other-than-temporary. As of March 31, 2010, we reviewed our portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. During the period ended March 31, 2010 and 2009, the Company recognized no other than temporary impairment losses.  Based on our qualitative and quantitative OTTI review of each asset class within our fixed maturity portfolio, the remaining unrealized losses on fixed maturities at March 31, 2010, were primarily due to widening of credit spreads relating to the market illiquidity, rather than credit events. Because it is more likely than not that we will not be required to sell these securities until a recovery of fair value to amortized cost, we currently believe it is probable that we will collect all amounts due according to their respective contractual terms. Therefore we do not consider these fixed maturities to be other-than-temporarily impaired at March 31, 2010.
 
(b)           Realized and unrealized gains and losses
 
Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method and include adjustments to the cost basis of investments for declines in value that are considered to be other-than-temporary. The following provides an analysis of realized gains and losses:
 
For the Three Months Ended March 31, 2010
 
Gross Gains
   
Gross Losses
   
Net
 
Fixed maturity securities
  $ 312     $     $ 312  
Other investments
                 
Net realized gains (losses)
  $ 312     $     $ 312  
 
For the Three Months Ended March 31, 2009
   
Gross Gains
     
Gross Losses
     
Net
 
Fixed maturity securities
 
$
1,755
   
$
(3,670
)
 
$
(1,915
)
Other investments
   
     
(15
)
   
(15
Net realized gains (losses)
 
$
1,755
   
$
(3,685
)
 
$
(1,930
)
 
Proceeds from sales of fixed maturities classified as available for sale were $37,737 and $85,769 for the periods ended March 31, 2010 and 2009, respectively.
 
Net unrealized gain (loss) was as follows:
 
   
March 31, 2010
   
March 31, 2009
 
Fixed maturities
 
$
57,039
   
$
(60,452
)
Other investments
   
(80
)
   
(533
)
Total net unrealized gain (loss)
   
56,959
     
(60,985
)
Deferred income tax expense
   
     
 
Net unrealized losses, net of deferred income tax
 
$
56,959
   
$
(60,985
)
Change in unrealized gain (loss), net of deferred income tax
 
$
24,212
   
$
(16,486
)
 
(c)           Restricted Cash and Investments
 
We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trust as collateral are primarily cash and highly rated fixed maturity securities. The fair value of our restricted assets was as follows:
 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.      Investments (continued)
 
   
March 31,
2010
   
December 31,
2009
 
Restricted cash – third party agreements
  $ 106,444     $ 133,029  
Restricted cash – related party agreements
    10,979       11,485  
Restricted cash – U.S. state regulatory authorities
    216       430  
Total restricted cash
    117,639       144,944  
Restricted investments – in Trust for third party agreements at fair value (amortized cost: 2010 – $914,105;  2009 – $1,011,582)
    946,098       1,022,337  
Restricted investments – in Trust for related party agreements at fair value (amortized cost: 2010 – $210,275; 2009 – $177,537)
    235,110       195,474  
Restricted investments – in Trust for U.S. state regulatory authorities (amortized cost: 2010 – $13,316; 2009 – $13,032)
    13,190       12,867  
Total restricted investments
    1,194,398       1,230,678  
Total restricted cash and investments
  $ 1,312,037     $ 1,375,622  
 
(d)           Other
 
The Company enters into repurchase agreements. The agreements are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities, that it invests or holds in short term or fixed income securities. As of March 31, 2010, there were $76,324 principal amount outstanding at interest rate of 0.22%. Interest expense associated with these repurchase agreements was $57 for the three months ended March 31, 2010, out of which $11 was accrued as of March 31, 2010. The Company has approximately $76,324 of collateral pledged in support of these agreements.
 
4.      Fair Value of Financial Instruments
 
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:
 
·
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
 
 
·
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
   
·
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
 
In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
 
ASC 825, “Disclosure about Fair Value of Financial Instruments,” requires all entities to disclose the fair value of their financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value.
 
The Company uses the following methods and assumptions in estimating its fair value disclosure for its financial instruments.
 
 
11

 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
4.      Fair Value of Financial Instruments (continued)
 
Investments available for sale. Investments available for sale are recorded at fair value on a recurring basis and include fixed maturities and securities sold under agreements to repurchase. Fair value of investments is measured based upon quoted prices in active markets, if available. If quoted prices in active markets are not available, fair values are measured by an independent pricing service that utilizes valuation techniques based upon observable market data. Level 1 investments include those traded on an active exchange, such as the NASDAQ. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the independent pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information. These investments are classified as Level 2 investments and include obligations of U.S. government agencies, municipals and corporate debt securities.
 
Other investments. Other investments consist primarily of hedge funds where the fair value estimate is determined by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes other investments in the amount disclosed in Level 3.
 
Reinsurance balance receivable. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value due to short term nature of the assets.
 
Loan to related party. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.
 
Junior subordinated debt. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.
 
(a)    Fair Value Hierarchy

The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of March 31, 2010 and December 31, 2009:
 
March 31, 2010
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value
 
Assets
 
 
   
 
   
 
   
 
 
Fixed maturities
                       
    U.S. treasury bonds
  $ 39,259     $     $     $ 39,259  
    U.S. agency bonds – mortgage and asset - backed
          834,924             834,924  
    U.S. agency bonds – other
          194,730             194,730  
    Corporate fixed maturities
          635,300             635,300  
    Municipal bonds
          22,259             22,259  
Other investments
                5,601       5,601  
Total
  $ 39,259     $ 1,687,213     $ 5,601     $ 1,732,073  
As a percentage of total assets
    1.4 %     61.9 %     0.2 %     63.5 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $ 76,324     $     $ 76,324  
As a percentage of total liabilities
          3.8 %           3.8 %
 
 
12

 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
4.      Fair Value of Financial Instruments (continued)
 
December 31, 2009
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value
 
Assets
 
 
                   
Fixed maturities
                       
    U.S. treasury bonds
  $ 39,238     $     $     $ 39,238  
    U.S. agency bonds – mortgage and asset-backed
          794,583             794,583  
    U.S. agency bonds – other
          221,517             221,517  
    Corporate fixed maturities
          582,664             582,664  
    Municipal bonds
          23,690             23,690  
Other investments
                5,549       5,549  
Total
  $ 39,238     $ 1,622,454     $ 5,549     $ 1,667,241  
As a percentage of total assets
    1.5 %     61.5 %     0.2 %     63.2 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $ 95,401     $     $ 95,401  
As a percentage of total liabilities
          4.9 %           4.9 %
 
(b)     Level 3 Financial Instruments
 
The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis for the three months ended March 31, 2010 and 2009:
 
 
Three Months
Ended
March 31, 2010
   
Three Months
Ended
March 31, 2009
 
Balance at beginning of period
  $ 5,549     $ 5,291  
Net realized and unrealized gains  – included in net income
           
Net realized and unrealized losses – included in net income
          (15 )
Change in net unrealized gains – included in other comprehensive income (loss)
           
Change in net unrealized losses – included in other comprehensive income (loss)
    55       (6 )
Purchases
          138  
Sales and redemptions
    (3 )     (22 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 5,601     $ 5,386  
                 
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $ (15 )
 
5.      Goodwill and Intangible Assets
 
Goodwill
 
Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. The Company performs an annual impairment analysis to identify potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized. This annual test is performed during the fourth quarter of each year or more frequently if events or circumstances change in a way that requires the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing requires an evaluation of the estimated fair value of each reporting unit to its carrying value, including the goodwill. An impairment charge is recorded if the estimated fair value is less than the carrying amount of the reporting unit. No impairments have been identified to date.
 
 
13

 

MAIDEN HOLDINGS, LTD.
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
5.      Goodwill and Intangible Assets (continued)
 
Intangibles
 
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks. Insurance company licenses are considered indefinite life intangible assets subject to annual impairment testing.
 
The following table shows an analysis of goodwill and intangible assets as of March 31, 2010 and December 31, 2009:
 
March 31, 2010
   
Gross
     
Accumulated
Amortization
     
Net
 
Useful Life
Goodwill
  $ 52,617     $     $ 52,617  
Indefinite
State licenses
    7,727             7,727  
Indefinite
Customer relationships
    51,400       (9,295 )     42,105  
15 years double declining
Net balance
  $ 111,744     $ (9,295 )   $ 102,449    
 
December 31, 2009
   
Gross
     
Accumulated
Amortization
     
Net
Useful Life
Goodwill
 
$
52,617
   
$
   
$
52,617
 
Indefinite
State licenses
   
7,727
     
     
7,727
 
Indefinite
Customer relationships
   
51,400
     
(7,843
)
   
43,557
 
15 years double declining
Net balance
 
$
111,744
   
$
(7,843
)
 
$
103,901
   
 
The goodwill and intangible assets were recognized in 2009 and 2008 as a result of the GMAC Acquisition and are assigned to Diversified Reinsurance segment. Goodwill and intangible assets are subject to annual impairment testing. No impairment was recorded during the three months ended March 31, 2010. The estimated amortization expense for the next five years is:
 
   
March 31,
2010
 
2010
  $ 4,356  
2011
    5,033  
2012
    4,362  
2013
    3,781  
2014
    3,276  
 
6.      Junior Subordinated Debt
 
On January 20, 2009, the Company completed a private placement of 260,000 units (the “Units” or the “TRUPS Offering”), each Unit consisting of $1,000 principal amount of capital securities (the “Trust Preferred Securities”) of Maiden Capital Financing Trust (the “Trust”), a special purpose trust established by Maiden Holdings North America, Ltd. ("Maiden NA"), and 45 common shares, $0.01 par value, of the Company (the “Common Shares”), for a purchase price of $1,000.45 per Unit. We also issued 11,700,000 common shares to the purchasers in the “TRUPS Offering”. This resulted in gross proceeds to the Company of $260,117, before $4,342 of placement agent fees and expenses. Certain trusts established by Michael Karfunkel and George Karfunkel, two of the Company’s founding shareholders, purchased an aggregate of 159,000 of the Units or 61.12%. The remaining 101,000 Units were purchased by existing institutional shareholders of the Company.
 
The Trust used the proceeds from the sale of the Trust Preferred Securities to purchase a subordinated debenture (the “Debenture”) in the principal amount of $260,000 issued by Maiden NA.
 
Under the terms of the Trust Preferred Securities, the Company can repay the principal balance in full or in part at any time. However, if the Company repays such principal within five years of the date of issuance, it is required to pay an additional amount equal to one full year of interest on the amount of Trust Preferred Securities repaid. If the full amount of the Trust Preferred Securities were repaid within five years of the date of issuance, the additional amount due would be $36,400, which would be a reduction in earnings.
 
 
14

 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
6.      Junior Subordinated Debt (continued)
 
Pursuant to separate Guarantee Agreements dated as of January 20, 2009 with Wilmington Trust Company, as guarantee trustee, each of the Company and Maiden NA has agreed to guarantee the payment of distributions and payments on liquidation or redemption of the Trust Preferred Securities.
 
As a consequence of the issuance of a majority of the Units to a related party under, ASC Topic 810 “Consolidation”, the Trust is a variable interest entity and the Company is deemed not to be the Primary beneficiary of the Trust and therefore it is not consolidated. The issuance of common shares associated with the Trust Preferred Securities resulted in an original issuance discount of $44,928 based on market price of $3.85 on January 20, 2009. The discount is amortized over 30 years based on the effective interest method. The Debentures and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%.
 
As of March 31, 2010, the stated value of the Trust Preferred Securities was $215,140 which comprises the principal amount of $260,000 and unamortized discount of $44,860. Amortization expense for the three months ended March 31, 2010 was $15.
 
7.      Earnings Per Share
 
The following is a summary of the elements used in calculating basic and diluted earnings per share: 
 
   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
 
Net income available to common shareholders
 
$
13,569
   
$
13,100
 
         
Weighted average number of common shares outstanding - basic
   
70,291,312
     
67,687,664
 
                 
Potentially dilutive securities:
               
Warrants
   
     
 
Share options
   
485,482
     
250,126
 
Weighted average number of common shares outstanding - diluted
   
70,776,794
     
67,937,790
 
Basic and diluted earnings per common share:
 
$
0.19
   
$
0.19
 
 
As of March 31, 2010, 4,050,000 (2009: 4,050,000) warrants and 1,584,964 (2009: 662,000) share options were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
 
8.      Share Based Compensation
 
Share Options
 
The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all share option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The adoption of ASC Topic 718 "Compensation - Stock Compensation" fair value method has resulted in share-based expense (a component of salaries and benefits) in the amount of approximately $210 and $159 for the three months ended March 31, 2010 and 2009, respectively. 
 
The key assumptions used in determining the fair value of options granted in the three months ended March 31, 2010 and a summary of the methodology applied to develop each assumption are as follows:  
 
Assumptions:
 
March 31,
2010
 
Volatility
   
29.8-46.0
%
Risk-free interest rate
   
2.36-3.30
%
Weighted average expected lives in years
 
5-6.1 years
 
Forfeiture rate
   
0
%
Dividend yield rate
   
1-5.39
%
 
 
15

 
 
MAIDEN HOLDINGS, LTD.
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
8.      Share Based Compensation (continued)
 
Expected Price Volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The common shares of Maiden Holdings, Ltd. began trading on May 6, 2008 on NASDAQ.  Since the Company does not have enough history over which to calculate an expected volatility representative of the volatility over the expected lives of the options, the Company also considered the historical and current implied volatilities of a set of comparable companies in the industry in which the Company operates.
 
Risk-Free Interest Rate – This is the U.S. treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense. 
 
Expected Lives – This is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period as historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense.
 
Forfeiture Rate – This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense.
 
The following schedules shows all options granted, exercised, expired and exchanged under the Plan for the three months ended March 31, 2010:
 
Three Months Ended March 31, 2010
 
Number of
Share
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Term
 
Outstanding, December 31, 2009
    2,036,542     $ 5.79    
8.86 years
 
Granted
    300,000       7.25    
9.93 years
 
Exercised
    (468 )     3.28        
Cancelled
    (250 )     3.28        
Outstanding, March 31, 2010
    2,335,824     $ 5.98    
8.78 years
 
 
The following schedule shows all options granted, exercised, expired and exchanged under the Plan for the three months ended March 31, 2009:
 
Three Months Ended March 31, 2009
 
Number of
Share
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Term
 
Outstanding, December 31, 2008
    1,519,834     $ 10.00    
9.44 years
 
Granted
    150,000       4.39    
9.91 years
 
Exercised
                 
Cancelled
    (200,000 )     8.32        
Outstanding, March 31, 2009
    1,469,834     $ 5.55    
9.31 years
 
 
The weighted average grant date fair value was $1.76 and $0.82 for all options outstanding at March 31, 2010 and 2009, respectively. There was approximately $2,647 and $1,878 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of March 31, 2010 and 2009, respectively.
 
16

 
MAIDEN HOLDINGS, LTD.
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
9.      Dividends Declared
 
On March 3, 2010, the Company’s Board of Directors approved a quarterly cash dividend of $0.065 per common share. This dividend was paid on April 15, 2010 to shareholders of record on April 1, 2010.
 
10.    Related Party Transactions
 
The Founding Shareholders of Maiden, Michael Karfunkel, George Karfunkel and Barry Zyskind, are also the principal shareholders, and, respectively, the Chairman of the Board of Directors, a Director, and the President and Chief Executive Officer and Director of AmTrust Financial Services, Inc. (“AmTrust”).  In January 2009, Barry Karfunkel was hired as a managing director of capital investments of Maiden Re Insurance Services, LLC. Barry Karfunkel is the son of Michael Karfunkel and the brother-in-law of Barry D. Zyskind. Barry Karfunkel’s employment ended in March 2010. The following describes transactions between the Company and AmTrust.
 
AmTrust Quota Share Reinsurance Agreement
 
Effective July 1, 2007, the Company and AmTrust entered into a master agreement, as amended (the “Master Agreement”), by which they caused AmTrust’s Bermuda reinsurance subsidiary, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance Company Ltd. (“Maiden Insurance” or “Maiden Bermuda”) to enter into the Reinsurance Agreement by which (a) AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written by subsidiaries of AmTrust, net of the cost of unaffiliated inuring reinsurance (and in the case of AmTrust’s U.K. insurance subsidiary, IGI Insurance Company Limited (“IGI”), net of commissions) and 40% of losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust subsidiaries’ unearned premium reserves, effective as of July 1, 2007, with respect to the current lines of business, excluding risks for which the AmTrust subsidiaries’ net retention exceeds $5,000 (“Covered Business”). AmTrust also has agreed to cause AII, subject to regulatory requirements, to reinsure any insurance company which writes Covered Business in which AmTrust acquires a majority interest to the extent required to enable AII to cede to Maiden Insurance 40% of the premiums and losses related to such Covered Business. The Agreement further provides that AII receives a ceding commission of 31% of ceded written premiums. The Reinsurance Agreement has an initial term of three years, which has been extended for three years through June 30, 2013, and will automatically renew for successive three year terms thereafter, unless either AII or Maiden Insurance notifies the other of its election not to renew not less than nine months prior to the end of any such three year term. In addition, either party is entitled to terminate on thirty days notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of AII or Maiden Insurance, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the combined shareholders’ equity of AII and the AmTrust subsidiaries.
 
On June 11, 2008, the Company and AmTrust amended the Reinsurance Agreement to add Retail Commercial Package Business to the Covered Business as a consequence of AmTrust’s acquisition of Unitrin Business Insurance (UBI). Under the amendment, AmTrust’s subsidiaries cede, upon collection, to Maiden 100% of $82.2 million of unearned premium (net of inuring reinsurance) from the acquisition of UBI’s in-force book of business. Additionally, AmTrust cedes to Maiden 40% of net premium written, effective as of June 1, 2008. Maiden will pay to AmTrust a ceding commission of 34.375% on the unearned premium cession and the Retail Commercial Package Business. The $2,000 maximum liability for a single loss provided in the Quota Share Reinsurance Agreement shall not be applicable to Retail Commercial Package Business.
 
On February 9, 2009, AII and Maiden Insurance amended the Reinsurance Agreement to clarify that (i) AII would offer Maiden Insurance the opportunity to reinsure Excess Retention Business, which is defined as a policy issued by an AmTrust insurance subsidiary with respect to which the insurance subsidiary’s retention is greater than $5 million and (ii) the deduction for the cost of inuring reinsurance from Affiliate Subject Premium (as defined in the Reinsurance Agreement) retroceded to Maiden Insurance is net of ceding commission.

 
17

 
MAIDEN HOLDINGS, LTD.
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
10.    Related Party Transactions (continued)
 
The Company recorded approximately $34,765 and $29,254 of ceding commission expense for the three months ended March 31, 2010 and 2009, respectively as a result of this transaction.
 
Other Reinsurance Agreements
 
Effective January 1, 2008 the Company and AmTrust entered into an agreement to reinsure a 45% participation in the $9 million in excess of $1 million layer of AmTrust’s workers’ compensation excess of loss program. This layer provides reinsurance to AmTrust for losses per occurrence in excess of $1 million up to $10 million, subject to an annual aggregate deductible of $1.25 million. This participation was sourced through a reinsurance intermediary via open market placement in which competitive bids were solicited by an independent broker. The remaining 55% participation was placed with a single carrier. This coverage expired on January 1, 2010; as a result, under the Master Agreement the Company therefore now reinsures 40% of the subject workers’ compensation business up to $10 million, subject to certain additional inuring reinsurance protection AmTrust has purchased.
 
As of January 1, 2008, the Company had a 50% participation in a $4 million in excess of $1 million specialty transportation program written by AmTrust. Starting January 1, 2009, we had a 30% participation in a $4 million in excess of $1 million specialty transportation program written by AmTrust. This program provides primarily commercial auto coverage and, to a lesser extent, general liability coverage to private non-emergency para-transit and school bus service operators. This participation was sourced through a reinsurance intermediary via open market placement in which competitive bids were solicited by an independent broker. Several other broker market reinsurers hold the other 50% and 70% participation for 2008 and 2009 policies, respectively. The agreement was not renewed as of January 1, 2010.
 
Collateral provided to AmTrust
 
In order to provide AmTrust’s U.S. insurance subsidiaries with credit for reinsurance on their statutory financial statements, AII, as the direct reinsurer of the AmTrust’s insurance subsidiaries, has established trust accounts (“Trust Accounts”) for their benefit. Maiden Insurance has agreed to provide appropriate collateral to secure its proportional share under the Quota Share Agreement of AII’s obligations to the AmTrust subsidiaries to whom AII is required to provide collateral. This collateral may be in the form of (a) assets loaned by Maiden Insurance to AII, for deposit into the Trust Accounts, pursuant to a loan agreement between those parties, (b) assets transferred by Maiden Insurance, for deposit into the Trust Accounts, (c) a letter of credit obtained by Maiden Insurance and delivered to an AmTrust subsidiary on AII’s behalf (a “Letter of Credit”), or (d) premiums withheld by an AmTrust subsidiary at Maiden Insurance’s request in lieu of remitting such premiums to AII (“Withheld Funds”). Maiden Insurance may provide any or a combination of these forms of collateral, provided that the aggregate value thereof equals Maiden Insurance’s proportionate share of its obligations under the Quota Share Agreement with AII. If collateral is required to be provided to any AmTrust subsidiary under applicable law or regulatory requirements, Maiden Insurance will provide collateral to the extent required, although Maiden Insurance does not expect that such collateral will be required unless an AmTrust subsidiary is domiciled in the United States.
 
Maiden Insurance satisfied its collateral requirements under the Quota Share Agreement with AII as follows:
 
· 
 by lending funds in the amount of $167,975 as at March 31, 2010 and December 31, 2009 to AII pursuant to a loan agreement entered into between those parties. This loan is carried at cost. The amount of collateral Maiden Insurance is required to maintain, which is determined quarterly, equals its proportionate share of (a) the amount of ceded paid losses for which AII is responsible to such AmTrust subsidiaries but has not yet paid, (b) the amount of ceded loss reserves (including ceded reserves for claims reported but not resolved and losses incurred but not reported) for which AII is responsible to AmTrust subsidiaries, and (c) the amount of ceded reserves for unearned premiums ceded by AmTrust subsidiaries to AII. Pursuant to the Master Agreement, AmTrust has agreed to cause AII not to commingle Maiden Insurance’s assets with AII’s other assets and to cause the AmTrust subsidiaries not to commingle Maiden Insurance’s assets with the AmTrust subsidiaries’ other assets if an AmTrust subsidiary withdraws those assets. AII has agreed that, if an AmTrust subsidiary returns to AII excess assets withdrawn from a Trust Account, drawn on a Letter of Credit or maintained by such AmTrust subsidiary as Withheld Funds, AII will immediately return to Maiden Insurance its proportionate share of such excess assets. AII has further agreed that if the aggregate fair market value of the amount of Maiden Insurance’s assets held in the Trust Account exceeds Maiden Insurance’s proportionate share of AII’s obligations, or if an AmTrust subsidiary misapplies any such collateral, AII will immediately return to Maiden Insurance an amount equal to such excess or misapplied collateral, less any amounts AII has paid to Maiden Insurance. In addition, if an AmTrust subsidiary withdraws Maiden Insurance’s assets from a Trust Account and maintains those assets on its books as withheld funds, AII has agreed to pay to Maiden Insurance interest at the rate equivalent to the one-month London Interbank Offered Rate (“LIBOR”) plus 90 basis points per annum computed on the basis of a 360-day year on the loan (except to the extent Maiden Insurance’s proportionate share of AII’s obligations to that AmTrust subsidiary exceeds the value of the collateral Maiden Insurance has provided), and net of unpaid fees Maiden Insurance owes to AIIM and its share of fees owed to the trustee of the Trust Accounts.

 
18

 
 
MAIDEN HOLDINGS, LTD.
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
10.   Related Party Transactions (continued)
 
· 
effective December 1, 2008, the Company entered into a Reinsurer Trust Assets Collateral agreement to provide to AII sufficient collateral to secure its proportional share of AII’s obligations to the U.S. AmTrust subsidiaries. The amount of the collateral, as at March 31, 2010 was approximately $246,089 (December 31, 2009 – $206,960) and the accrued interest was $2,718 (December 31, 2009 – $1,956).
 
Reinsurance Brokerage Agreements
 
Effective July 1, 2007, the Company entered into a reinsurance brokerage agreement with AII Reinsurance Broker Ltd., a subsidiary of AmTrust. Pursuant to the brokerage agreement, AII Reinsurance Broker Ltd. provides brokerage services relating to the Quota Share Reinsurance Agreement for a fee equal to 1.25% of the premium reinsured from AII. The brokerage fee is payable in consideration of AII Reinsurance Broker Ltd’s brokerage services. AII Reinsurance Broker Ltd. is not the Company’s exclusive broker.  AII Reinsurance Broker Ltd. may, if mutually agreed, also produce reinsurance for the Company from other ceding companies, and in such cases the Company will negotiate a mutually acceptable commission rate. The Company recorded approximately $1,383 and $1,155 of reinsurance brokerage expense for the three months ended March 31, 2010 and 2009, respectively, and deferred reinsurance brokerage of $3,401 and $3,265 as at March 31, 2010 and December 31, 2009, respectively, as a result of this agreement.
 
Effective April 1, 2008, the Company entered into brokerage services agreements with IGI Intermediaries Limited and IGI Inc. (“IGI”), both subsidiaries of AmTrust. Pursuant to the brokerage services agreements, IGI provides marketing services to us which includes providing marketing material to potential policyholders, providing us with market information on new trends and business opportunities and referring new brokers and potential policyholders to us. A fee equal to IGI‘s costs in providing such services plus 8% is payable in consideration of IGI’s marketing services. The Company recorded approximately $nil and $152 expense, which is included in other operating expenses, for the three ended March 31, 2010 and 2009, respectively.
 
Asset Management Agreement
 
Effective July 1, 2007 and as amended, the Company entered into an asset management agreement with AII Insurance Management Limited (“AIIM”), an AmTrust subsidiary, pursuant to which AIIM has agreed to provide investment management services to the Company.  Pursuant to the asset management agreement, AIIM provides investment management services for an annual fee equal to 0.35% of average invested assets plus all costs incurred.  Effective April 1, 2008, the investment management services annual fee has been reduced to 0.20% if the average value of the account is less than $1 billion and 0.15% if the average value of the account is greater than $1 billion.  The Company recorded approximately $656 and $597 of investment management fees for the three months ended March 31, 2010 and 2009, respectively, as a result of this agreement.
 
ACAC Quota Share Reinsurance Agreement
 
On March 1, 2010, the Company entered into a three year 25% quota share reinsurance agreement with American Capital Acquisition Corporation (“ACAC”).
 
ACAC is an insurance holding company owned by the 2005 Michael Karfunkel Grantor Retained Annuity Trust (the “Trust”), which in turn is controlled by Michael Karfunkel (“Karfunkel”), Karfunkel, individually, and AmTrust. ACAC, on March 1, 2010, acquired from GMAC Insurance Holdings, Inc. and Motors Insurance Corporation (collectively, “GMAC”), GMAC’s personal lines automobile business. Karfunkel is a Founding Shareholder of the Company. In addition, Karfunkel is the chairman of the board of directors of ACAC and Barry D. Zyskind, the Companys Chairman, is serving as an executive of ACAC on an interim basis.

 
19

 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)

10.   Related Party Transactions (continued)
 
The Company, subject to all required regulatory approval, effective March 1, 2010, shall reinsure 25% of the net premiums of the GMAC personal lines business, pursuant to a 50% quota share reinsurance agreement (“ACAC Quota Share”) with the GMAC personal lines insurance companies, as cedents, and the Company, MK Re, Ltd., a Bermuda reinsurer which is a wholly-owned subsidiary of the Trust, and AmTrust., as reinsurers. The Company has a 50% participation in the ACAC Quota Share, by which it receives 25% of net premiums of the personal lines business. The ACAC Quota Share provides that the reinsurers, severally, in accordance with their participation percentages, shall receive 50% of the net premium of the GMAC personal lines insurance companies and assume 50% of the related net losses. The ACAC Quota Share has an initial term of three years and shall renew automatically for successive three year terms unless terminated by written notice not less than nine months prior to the expiration of the current term. Notwithstanding the foregoing, the Company’s participation in the Personal Lines Quota Share may be terminated by the ACAC on 60 days written notice in the event the Company becomes insolvent, is placed into receivership, its financial condition is impaired by 50% of the amount of its surplus at the inception of the ACAC Quota Share or latest anniversary, whichever is greater, is subject to a change of control, or ceases writing new and renewal business. ACAC also may terminate the agreement on nine months written notice following the effective date of initial public offering or private placement of stock by ACAC or a subsidiary. The Company may terminate its participation in the ACAC Quota Share on 60 days written notice in the event ACAC is subject to a change of control, cease writing new and renewal business, effects a reduction in their net retention without the Company’s consent or fails to remit premium as required by the terms of the ACAC Quota Share. The ACAC Quota Share provides that the reinsurers pay a provisional ceding commission equal to 32.5% of ceded earned premium, net of premiums ceded by the personal lines companies for inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is 60.5% or less and a minimum of 30.5% if the loss ratio is 64.5% or higher. We believe that the terms, conditions and pricing of the ACAC Quota Share have been determined by arm’s length negotiations and reflect current market terms and conditions.
 
The Company recorded approximately $679 of ceding commission expense for the three months ended March 31, 2010 as a result of this transaction.
 
11.   Segments
 
The Company currently operates three business segments, Diversified Reinsurance, AmTrust Quota Share and ACAC Quota Share. The Company evaluates segment performance based on segment profit separately from the results of our investment portfolio. Other operating expenses allocated to the segments are called General and Administrative expenses which are allocated on an actual basis except salaries and benefits where management’s judgment is applied; the Company does not allocate general corporate expenses to the segments. In determining total assets by segment the Company identifies those assets that are attributable to a particular segment such as reinsurance receivable, deferred commissions and acquisition cost, loans, goodwill and intangibles, and restricted cash and investments. All remaining assets are allocated to Corporate.
 
20


MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)

11.   Segments (continued)
 
The following tables summarize the underwriting results of our operating segments:   
 
For the three months ended March 31, 2010
 
Diversified Reinsurance
   
AmTrust Quota Share
   
ACAC
Quota Share
   
Total
 
Net premiums written
 
$
167,914
   
$
121,556
   
$
21,821
   
$
311,291
 
Net premiums earned
   
151,180
     
110,659
     
2,090
     
263,929
 
Net losses and loss expenses
   
(99,417
)
   
(69,562
)
   
(1,306
)
   
(170,285
)
Commissions and other acquisition costs
   
(40,514
)
   
(36,148
)
   
(734
)
   
(77,396
)
General and administrative expenses
   
(5,872
)
   
(474
)
   
     
(6,346
)
Underwriting income
 
$
5,377
   
$
4,475
   
$
50
   
$
9,902
 
                                 
Reconciliation to net income
                               
Net investment income and realized (loss)
                           
17,893
 
Amortization of intangible assets
                           
(1,452
)
Foreign exchange loss
                           
(1,153
)
Subordinated debt interest expense
                           
(9,115
)
Other operating expenses
                           
(2,206
)
Net Income before income taxes
                         
$
13,869
 
                                 
Net loss and loss expense ratio*
   
65.7
%
   
62.9
%
   
62.5
%
   
64.5
%
Acquisition cost ratio**
   
26.8
%
   
32.7
%
   
35.1
%
   
29.3
%
General and administrative expense ratio***
   
3.9
%
   
0.4
%
   
%
   
3.3
%
Combined ratio****
   
96.4
%
   
96.0
%
   
97.6
%
   
97.1
%

For the three months ended March 31, 2009
 
Diversified Reinsurance
   
AmTrust Quota Share
   
ACAC
Quota Share
   
Total
 
Net premiums written
 
$
251,177
   
$
85,371
   
$
   
$
336,548
 
Net premiums earned
   
117,67 2
     
92,420
     
     
210,092
 
Net losses and loss expenses
   
(89,016
)
   
(57,272
)
   
     
(146,288
)
Commissions and other acquisition costs
   
(16,222
)
   
(30,409
)
   
     
(46,631
)
General and administrative expenses
   
(5,726
)
   
(374
)
   
     
(6,100
)
Underwriting income
 
$
6,708
   
$
4,365
   
$
   
$
11,073
 
                                 
Reconciliation to net income
                               
Net investment income and realized (loss)
                           
12,329
 
Amortization of intangible assets
                           
(1,564
)
Foreign exchange loss
                           
(213
)
Subordinated debt interest expense
                           
(7,090
)
Other operating expenses
                           
(1,435
)
Net Income before income taxes
                         
$
13,100
 
                                 
Net loss and loss expense ratio*
   
75.6
%
   
62.0
%
   
%
   
69.6
%
Acquisition cost ratio**
   
13.8
%
   
32.9
%
   
%
   
22.2
%
General and administrative expense ratio***
   
4.9
%
   
0.4
%
   
%
   
3. 6
%
Combined ratio****
   
94.3
%
   
95. 3
%
   
%
   
95.4
%
 
 
Calculated by dividing net losses and loss expenses by net earned premium.
   
**
Calculated by dividing commission and other acquisition expenses by net earned premium
   
*** 
Calculated by dividing general and administrative expenses by net earned premium.
   
****
Calculated by adding together net loss and loss expense ratio, acquisition cost ratio and general and administrative expense ratio.
 
21


MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)

 
11.           Segments (continued)
 
   
Diversified
Reinsurance
   
AmTrust
Quota Share
   
ACAC
Quota Share
   
Total
 
As of March 31, 2010
 
 
   
 
         
 
 
Reinsurance balances receivable, net
  $ 212,144     $ 72,630     $ 14,463     $ 299,237  
Prepaid reinsurance
    26,268