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 September 30, 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
 
98-0570192
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
     
131 Front Street, Hamilton, Bermuda
 
HM12
(Address of principal executive offices)
 
(Zip Code)
     
(441) 298-4900
(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  x
     
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 November 8, 2010, the Registrant had one class of Common Shares ($.01 par value),
of which 72,105,885 shares were issued and outstanding.
 
 
 

 
 
INDEX
 
   
Page
PART I - Financial Information    
Item 1.     
Financial Statements
   
         
   
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
 
3
         
   
Condensed Consolidated Statement of Income and Comprehensive Income for the three and nine months ended September 30, 2010 and 2009 (unaudited)
 
4
         
   
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and 2009 (unaudited)
 
5
         
   
Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)
 
6
         
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
7
         
 Item 2.     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
31
 Item 3.     
Quantitative and Qualitative Disclosures About Market Risk
 
53
 Item 4.    
Controls and Procedures
 
54
PART II - Other Information    
 Item 6.     
Exhibits
 
55
   
Signatures
 
56
 
 
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)
 
   
September 30, 
2010
(Unaudited)
   
December 31, 
2009
(Audited)
 
ASSETS
           
Investments:
           
Fixed maturities, available for sale, at fair value (Amortized cost 2010: $1,505,431; 2009: $1,623,382)
  $
1,582,372
    $ 1,661,692  
Other investments, at fair value (Cost 2010: $5,534; 2009: $5,684)
   
5,531
 
    5,549  
Total investments
    1,587,903       1,667,241  
Cash and cash equivalents
   
269,486
      107,396  
Restricted cash and cash equivalents
    218,867       144,944  
Accrued investment income
    11,335       11,405  
Reinsurance balances receivable, net (includes $97,631 and $43,382 from related parties in 2010 and 2009, respectively)
    244,353       211,338  
Prepaid reinsurance
    31,575       28,752  
Reinsurance recoverable on unpaid losses
    6,000       11,984  
Loan to related party
    167,975       167,975  
Deferred commission and other acquisition costs (includes $114,154 and $85,979 from related parties in 2010 and 2009, respectively)
    187,241       172,983  
Other assets
    15,290       11,818  
Intangible assets, net
    46,928       51,284  
Goodwill
    52,617       52,617  
Total assets
  $ 2,839,570     $ 2,639,737  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Reserve for loss and loss adjustment expenses (includes $244,491 and $174,046 from related parties in 2010 and 2009, respectively)
  $ 1,093,857     $ 1,006,320  
Unearned premiums (includes $347,935 and $264,751 from related parties in 2010 and 2009, respectively)
    628,232       583,478  
Accrued expenses and other liabilities
    74,265       62,887  
Securities sold under agreements to repurchase, at contract value
    69,674       95,401  
Junior subordinated debt
    215,173       215,125  
Total liabilities
    2,081,201       1,963,211  
Commitments and Contingencies
               
Shareholders’ equity
               
Common shares ($0.01 par value; 73,068,030 and 71,253,625 shares issued in 2010 and 2009, respectively; 72,105,694 and 70,291,289 shares outstanding in 2010 and 2009, respectively)
    731       713  
Additional paid-in capital
    576,813       576,086  
Accumulated other comprehensive income
    76,938       32,747  
Retained earnings
    107,688       70,781  
Treasury shares, at cost (2010 and 2009: 962,336 shares)
    (3,801 )    
(3,801
Total shareholders’ equity
    758,369       676,526  
Total liabilities and shareholders’ equity
  $ 2,839,570     $ 2,639,737  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
3

 
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(In Thousands of United States Dollars, Except Per Share Data)
(Unaudited)
 
   
For the Three
Months Ended
September 30, 
2010
   
For the Three
Months Ended
September 30,
 2009
   
For the Nine
Months Ended
September 30, 
2010
   
For the Nine
Months Ended
September 30, 
2009
 
Revenues:
                       
Gross premiums written
  $ 289,815     $ 221,400     $ 951,981     $ 796,304  
Net premiums written
  $ 273,435     $ 221,400     $ 897,776     $ 796,304  
Change in unearned premiums
    36,158       15,950       (40,470 )     (125,021 )
Net earned premium
    309,593       237,350       857,306       671,283  
Net investment income
    17,500       16,778       53,956       46,150  
Net realized and unrealized investment gains (losses)
    1,627       (66     2,474       (462 )
Total revenues
    328,720       254,062       913,736       716,971  
Expenses:
                               
Loss and loss adjustment expenses
    200,625       165,123       546,264       462,468  
Commission and other acquisition expenses
    88,956       55,313       254,799       159,608  
Other operating expenses
    10,840       8,059       28,876       22,726  
Subordinated debt interest expense
    9,117       9,114       27,348       25,316  
Amortization of intangible assets
    1,452       1,676       4,356       4,915  
Foreign exchange (gains) losses
    (1,187     (210 )     380       (2,401 )
Total expenses
    309,803       239,075       862,023       672,632  
Income before income taxes
    18,917       14,987       51,713       44,339  
Income taxes:
                               
Current tax expense
    100             100        
Deferred tax expense
    291             881        
Income tax expense
    391             981        
Net income
  $ 18,526     $ 14,987     $ 50,732     $ 44,339  
                                 
Comprehensive income:
                               
Net income
  $ 18,526     $ 14,987     $ 50,732     $ 44,339  
Other comprehensive income
                               
Net unrealized holdings gains arising during the period
  $ 23,021     $ 48,148     $ 51,329     $ 77,154  
Adjustment for reclassification of realized (gains) losses recognized in net income
    (3,572 )     66       (7,138 )     462  
Other comprehensive income
  $ 19,449     $ 48,214     $ 44,191     $ 77,616  
Comprehensive income
  $ 37,975     $ 63,201     $ 94,923     $ 121,955  
Basic earnings per common share
  $ 0.26     $ 0.21     $ 0.72     $ 0.64  
Diluted earnings per common share
  $ 0.26     $ 0.21     $ 0.72     $ 0.63  
Dividends declared per common share
  $ 0.065     $ 0.06     $ 0.195     $ 0.18  
 
   
For the Three
Months Ended
September 30, 
2010
   
For the Three
Months Ended
September 30, 
2009
   
For the Nine
Months Ended
September 30, 
2010
   
For the Nine
Months Ended
September 30, 
2009
 
Net realized and unrealized 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 and unrealized investment gains (losses)
    1,627       (66 )     2,474       (462 )
Net realized and unrealized investment gains (losses)  
  $ 1,627     $ (66 )   $ 2,474     $ (462 )
 
  See accompanying notes to the unaudited condensed consolidated financial statements.
 
4

 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands of United States Dollars)
(Unaudited)
 
   
For the Nine
Months Ended
September 30, 
2010
   
For the Nine
Months Ended
September 30, 
2009
 
Common shares
           
Balance – beginning of period
 
$
713
   
$
596
 
Exercise of options and issuance of shares, net
   
18
     
117
 
Balance – end of period
   
731
     
713
 
Additional paid-in capital
   
 
     
 
 
Balance – beginning of period
   
576,086
 
   
530,519
 
Exercise of options and issuance of shares, net
   
43
     
44,928
 
Exchange of warrants for common shares
   
(18
)
   
 
Share based compensation
   
702
     
444
 
Balance – end of period
   
576,813
     
575,891
 
Accumulated other comprehensive income (loss)
   
 
     
 
 
Balance – beginning of period
   
32,747
     
(44,499
)
Net unrealized gains on securities
   
44,191
     
77,616
 
Balance – end of period
   
76,938
     
33,117
 
Retained earnings
   
 
     
 
 
Balance – beginning of period
   
70,781
     
26,944
 
Net income
   
50,732
     
44,339
 
Dividends on common shares
   
(13,825
)
   
(12,652
)
Balance – end of period
   
107,688
     
58,631
 
Treasury shares
   
 
         
Balance – beginning of period
   
(3,801
)
   
(3,801
)
Shares repurchased
   
     
 
Balance – end of period
   
(3,801
)
   
(3,801
)
Total Shareholders’ Equity
 
$
758,369
   
$
664,551
 

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 Nine
Months Ended
September 30, 
2010
   
For the Nine
Months Ended
September 30, 
2009
 
Cash flows from operating activities:
           
Net income
 
$
50,732
   
$
44,339
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
           
 
 
Depreciation and amortization of intangibles
   
5,370
     
5,426
 
Net realized and unrealized (gain) loss on investments
   
(2,474
)
   
462
 
Foreign exchange losses (gains) on revaluation
   
380
     
(2,401
)
Amortization of share-based compensation expense, bond premium and discount and trust preferred securities discount
   
(4,313
)
   
(4,615
)
Changes in assets - (increase) decrease:
           
 
 
Reinsurance balances receivable, net
   
(46,938
)
   
(169,244
)
Prepaid reinsurance
   
(2,823
)
   
 
Accrued investment income
   
70
     
(695
)
Deferred commission and other acquisition costs
   
(14,258
)
   
(66,604
)
Other assets
   
(3,570
   
(1,702
)
Changes in liabilities – increase (decrease):
           
 
 
Reserve for loss and loss adjustment expenses, net
   
93,525
     
72,706
 
Unearned premiums
   
44,754
     
125,022
 
Accrued expenses and other liabilities
   
(6,238
   
(13,896
)
Net cash provided by (used in) operating activities
   
114,217
     
(11,202
)
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities – available-for-sale
   
(408,765
)
   
(739,006
)
Purchases of fixed-maturity securities – trading
   
(918,476
)
   
 
Purchases of other investments
   
(136
)
   
(138
)
Sale of investments:
   
 
     
 
 
Proceeds from sales of fixed-maturity securities – available-for-sale
   
113,136
     
153,991
 
Proceeds from sales of fixed-maturity securities – trading and short sales
   
967,548
     
 
Proceeds from maturities and calls of fixed-maturity securities
   
409,061
     
263,832
 
Proceeds from redemption of other investments
   
38
     
127
 
(Increase) decrease in restricted cash and cash equivalents
   
(73,923
)
   
190,682
 
Acquisition of subsidiary (net of cash required)
   
     
(13,613
Purchase of capital assets
   
(916
)
   
(122
)
Net cash provided by (used in) in investing activities
   
87,567
     
(144,247
)
Cash flows from financing activities:
               
Repurchase agreements, net
   
(25,727
)
   
(126,630
)
Common share issuance
   
43
     
117
 
Junior subordinated debt issuance
   
     
260,000
 
Junior subordinated debt issuance cost
   
     
(4,342
)
Dividend paid
   
(13,707
)
   
(11,950
)
Net cash (used in) provided by financing activities
   
(39,391
)
   
117,195
 
Effect of exchange rate changes on foreign currency cash
   
(303
)
   
939
 
Net increase (decrease) in cash and cash equivalents
   
162,090
     
(37,315
Cash and cash equivalents, beginning of period
   
107,396
     
131,897
 
Cash and cash equivalents, end of period
 
$
269,486
   
$
94,582
 
                 
Supplemental information on cash flows
               
Cash paid for interest
 
$
27,300
   
$
17,694
 
Reinsurance balances receivables
   
17,806
     
 
Investments - fixed maturity securities     (17,806 )    
 
Supplemental information about non-cash investing and financing activities                
Discount on junior subordinated debt  
$
   
$
(44,928 )
Additional paid in Capital    
      44,928  
Common shares issued in exchange of warrants     18      
 
Additional paid in Capital     (18 )    
 
Redemption of other investment     4,751      
 
Purchase of other investment     (4,751 )    
 
 
 
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.
 
There were no material changes in the application of our critical accounting estimates subsequent to that report. However, the Company is amending its disclosure with regard to Fair Value of Financial Instruments to include the following:
 
·
For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in the Level 1 hierarchy. To date we have only included U.S. government fixed maturity investments as Level 1. The Company receives the quoted market prices from a third party, nationally recognized pricing service (“Pricing Service”). When quoted market prices are unavailable, the Company utilizes the Pricing Service to determine an estimate of fair value. The fair value estimates are included in the Level 2 hierarchy. The Pricing Service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. The Pricing Service’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare evaluations. In addition, the Pricing Service uses model processes, such as the Option Adjusted Spread model to assess interest rate impact and develop prepayment scenarios. The market inputs that the Pricing Service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
 
·
The Company utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is Level 2 or Level 3 hierarchy. Approximately 97% of the Company’s fixed maturity investments are categorized as Level 2 within the fair value hierarchy. At September 30, 2010 and December 31, 2009, we have not adjusted any prices provided by the Pricing Service.
 
·
The Company will challenge any prices for its investments that are not considered to represent fair value. If a fair value is challenged, the Company will obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought. As of September 30, 2010 and December 31, 2009, only one security was priced using the market approach at approximately $8,595 and $7,948, respectively, using a quotation from a broker as opposed to the Pricing Service. At September 30, 2010 and December 31, 2009, we have not adjusted any pricing provided by the broker-dealers based on the review performed by our investment managers.
 
 
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)

1. Basis of Presentation – Summary of Significant Accounting Policies (continued)
 
·
To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. In addition, our process to validate the market prices obtained from the Pricing Service includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. We also periodically perform testing of the market to determine trading activity, or lack of trading activity, as well as evaluating the variability of market prices. Securities sold during the quarter are also “back-tested” (i.e., the sales prices are compared to the previous month end reported market price to determine the reasonableness of the reported market price). There were no material differences between the prices from the Pricing Service and the prices obtained from our validation procedures as of September 30, 2010 and 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.
 
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.
 
 
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)

2. Recent Accounting Pronouncements (continued)
 
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). ASU 2010-26 modifies the types of costs that may be deferred, allowing insurance companies to only defer costs directly related to a successful contract acquisition or renewal. These costs include incremental direct costs of successful contracts, the portion of employees’ salaries and benefits related to time spent on acquisition activities for successful contracts and other costs incurred in the acquisition of a contract. Additional disclosure of the type of acquisition costs capitalized is also required. ASU 2010-26 is effective on prospective basis for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted as of the beginning of a company’s annual period. We are currently evaluating the impact of the adoption of ASU 2010-26 on our 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 September 30, 2010 and December 31, 2009 are as follows:
 
As at September 30, 2010
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed Maturities:
       
 
   
 
   
 
 
U.S. treasury bonds
 
$
43,620
 
 
$
1,615
   
$
   
$
45,235
 
U.S. agency bonds – mortgage and asset-backed
   
678,868
     
27,538
     
(34
)
   
706,372
 
U.S. agency bonds – other
   
67,707
     
2,350
     
     
70,057
 
Corporate fixed maturities
   
674,200
     
57,780
     
(13,770
)
   
718,210
 
Municipal bonds
   
41,036
     
1,483
     
(21
   
42,498
 
Total available-for-sale fixed maturities
   
1,505,431
     
90,766
     
(13,825
)
   
1,582,372
 
Other investments
   
5,534
   
 
     
(3
)
   
5,531
 
Total investments
 
$
1,510,965
   
$
90,766
   
$
(13,828
)
 
$
1,587,903
 

As at 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
 
 
 
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)
 
The contractual maturities of our fixed maturities as of September 30, 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.
 
As at September 30, 2010
 
Amortized Cost
   
Fair
Value
   
% of Total
 Fair Value
 
Maturity
 
 
         
 
 
Due in one year or less
 
$
96,058
   
$
97,109
     
6.1
%
Due after one year through five years
   
170,587
     
175,276
     
11.1
%
Due after five years through ten years
   
489,368
     
525,110
     
33.2
%
Due after ten years
   
70,550
     
78,505
     
5.0
%
     
826,563
     
876,000
     
55.4
%
Mortgage and asset-backed securities
   
678,868
     
706,372
     
44.6
%
Total
 
$
1,505,431
   
$
1,582,372
     
100.0
%
 
The following tables summarize our available-for-sale securities and other investments 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
 
As at September 30, 2010
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
                                   
U.S. treasury bonds
 
$
   
$
   
$
   
$
   
$
   
$
 
U.S. agency bonds – mortgage and asset-backed
   
2,517
     
(28
)
   
1,869
     
(6
)
   
4,386
     
(34
)
U.S. agency bonds - other
   
     
     
     
     
     
 
Corporate fixed maturities
   
36,608
     
(896
)
   
153,445
     
(12,874
)
   
190,053
     
(13,770
)
Municipal bonds
   
9,168
     
(21
)
   
     
     
9,168
     
(21
)
     
48,293
     
(945
)
   
155,314
     
(12,880
)
   
203,607
     
(13,825
)
Other investments
   
4,751
     
(3
)
   
     
     
4,751
     
(3
)
Total
 
$
53,044
   
$
(948
)
 
$
155,314
   
$
(12,880
)
 
$
208,358
   
$
(13,828
)
 
As of September 30, 2010, there were approximately 20 securities in an unrealized loss position with a fair value of $208,358 and unrealized losses of $13,828. Of these securities, there are 10 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $155,314 and unrealized losses of $12,880.

   
Less than 12 Months
   
12 Months or More
   
Total
 
As at 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
 
$
314,843
   
$
(3,668
)
 
$
199,234
   
$
(19,589
)
 
$
514,077
   
$
(23,257
)
 
 
10

 

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 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.

 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 September 30, 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 three and nine month periods ended September 30, 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 September 30, 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 September 30, 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.  In 2010, the Company commenced designating upon acquisition, certain U.S. Treasury bonds as trading for the purpose of augmenting where possible investment returns. In addition, the Company maintained one open position in a U.S. Treasury bond sold but not yet purchased valued at $54,274 which resulted in an unrealized loss of $1,945 and $4,664, which is recorded in net realized and unrealized gains (losses) on the Company’s consolidated statement of income for the three and nine months ended September 30, 2010, respectively. The following provides an analysis of realized and unrealized gains and losses for the three and nine months ended September 30, 2010 and 2009:
 
For the Three Months Ended September 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
3,612
   
$
(137
)
 
$
3,475
 
Trading securities
   
1,127
     
(781
)
   
346
 
Other investments
   
     
(249
   
(249
Realized gains (losses)
   
4,739
     
(1,167
)
   
3,572
 
Unrealized loss on short sales
   
     
(1,945
)
   
(1,945
)
Net realized and unrealized gains
 
$
4,739
   
$
(3,112
)
 
$
1,627
 

For the Nine Months Ended September 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
9,412
   
$
(1,756
)
 
$
7,656
 
Trading securities
   
1,649
     
(1,918
)
   
(269
)
Other investments
   
     
(249
   
(249
Realized gains (losses)
   
11,061
     
(3,923
)
   
7,138
 
Unrealized loss on short sales
   
     
(4,664
)
   
(4,664
)
Net realized and unrealized gains
 
$
11,061
   
$
(8,587
)
 
$
2,474
 

For the Three Months Ended September 30, 2009
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
270
   
$
(228
)
 
$
42
 
Other investments
   
     
(108
   
(108
)
Realized gains (losses)
 
$
270
   
$
(336
)
 
$
(66
)
 
 
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)

3. Investments (continued)

For the Nine Months Ended September 30, 2009
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
4,168
   
$
(4,507
)
 
$
(339
)
Other investments
   
     
(123
)
   
(123
)
Realized gains (losses)
 
$
4,168
   
$
(4,630
)
 
$
(462
)

Proceeds from sales of fixed maturities classified as available-for-sale were $113,136 and $153,991 for the nine months ended September 30, 2010 and 2009, respectively.
 
Net unrealized gain (loss) on available-for-sale securities and other investments was as follows:
 
   
September 30, 
2010
   
September 30, 
2009
 
Fixed maturities
 
$
76,941
   
$
35,000
 
Other investments
   
(3
)
   
(178
)
Total net unrealized gain (loss)
   
76,938
     
34,822
 
Deferred income tax expense
   
     
(1,705
)
Net unrealized losses, net of deferred income tax
 
$
76,938
   
$
33,117
 
Change in unrealized gain (loss), net of deferred income tax
 
$
44,191
   
$
77,616
 
 
(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:
 
   
September 30, 
2010
   
December 31, 
2009
 
Restricted cash – third party agreements
 
$
163,776
   
$
133,029
 
Restricted cash – related party agreements
   
54,828
     
11,485
 
Restricted cash – U.S. state regulatory authorities
   
263
     
430
 
Total restricted cash
   
218,867
     
144,944
 
Restricted investments – in Trust for third party agreements at fair value (Amortized cost: 2010 – $901,869; 2009 – $1,011,582)
   
948,158
     
1,022,337
 
Restricted investments – in Trust for related party agreements at fair value (Amortized cost: 2010 – $258,235; 2009 – $177,537)
   
287,418
     
195,474
 
Restricted investments – in Trust for U.S. state regulatory authorities (Amortized cost: 2010 – $13,305; 2009 – $13,032)
   
14,026
     
12,867
 
Total restricted investments
   
1,249,602
     
1,230,678
 
Total restricted cash and investments
 
$
1,468,469
   
$
1,375,622
 
 
 
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)

3. Investments (continued)

(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 September 30, 2010, there were $69,674 principal amount outstanding at interest rate of 0.32%. Interest expense associated with these repurchase agreements was $463 and $818 for the three and nine months ended September 30, 2010, respectively (2009 - $117 and $900, respectively), out of which $702 was accrued as of September 30, 2010 (December 31, 2009 - $33). The Company has approximately $69,674 of collateral pledged in support of these agreements.
 
Securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices.  The Company’s liability for securities to be delivered is measured at their fair value and as of September 30, 2010 were $54,274 for a U.S. Treasury bond.  This amount is included in accrued expenses and other liabilities in the condensed consolidated balance sheets.  Collateral of an equivalent amount has been pledged to the clearing broker.
  
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 following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of September 30, 2010.
 
 
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)

4. Fair Value of Financial Instruments (continued)

U.S. government and U.S. government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of U.S. government agencies securities in Level 2.
 
Corporate debt:   Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. These securities are generally priced by pricing services. The pricing services typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. The Company generally classifies the fair values of its corporate securities in Level 2.
 
Municipals:   Municipal securities comprise bonds issued by U.S. domiciled state and municipality entities. The fair values of these securities are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.
 
Other investments: The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.
 
 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.
 
 
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)
 
4. Fair Value of Financial Instruments (continued)
 
(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 September 30, 2010 and December 31, 2009:
 
As at September 30, 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
  $
45,235
    $     $     $ 45,235  
U.S. agency bonds – mortgage and asset-backed
   
 
    706,372             706,372  
U.S. agency bonds – other
   
 
    70,057             70,057  
Corporate fixed maturities
          718,210             718,210  
Municipal bonds
          42,498             42,498  
Other investments
                5,531       5,531  
Total
  $ 45,235     $ 1,537,137     $ 5,531     $ 1,587,903  
As a percentage of total assets
    1.6 %     54.1 %     0.2 %     55.9 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $ 69,674     $     $ 69,674  
Securities sold but not yet purchased
          54,274             54,274  
    $     $ 123,948     $     $ 123,948  
As a percentage of total liabilities
          6.0 %           6.0 %
 
As at 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
%
 
 
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)
 
4. Fair Value of Financial Instruments (continued)
 
(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 and nine months ended September 30, 2010 and 2009:
 
 
Three Months
Ended
September 30, 
2010
   
Three Months
Ended
September 30, 
2009
 
Balance at beginning of period
  $
5,677
    $ 5,392  
Net realized and unrealized gains – included in net income
           
Net realized and unrealized losses – included in net income
    (249     (108 )
Change in net unrealized gains – included in other comprehensive income (loss)
           
Change in net unrealized losses – included in other comprehensive income (loss)
    122       244  
Purchases
    4,764       1  
Sales and redemptions
    (4,783 )      
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 5,531     $ 5,529  
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  
 
Other Investments:
 
Nine Months
Ended
September 30, 
2010
   
Nine Months
Ended
September 30, 
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
    (249 )     (123 )
Change in net unrealized gains – included in other comprehensive income (loss)
           
Change in net unrealized losses – included in other comprehensive income (loss)
    133       350  
Purchases
    4,887       139  
Sales and redemptions
    (4,789 )     (128
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $
5,531
    $ 5,529  
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  
 
 
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)
 
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.
 
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 September 30, 2010 and December 31, 2009:
 
As at September 30, 2010
 
Gross
   
Accumulated
Amortization
   
Net
 
Useful Life
Goodwill
 
$
52,617
   
$
   
$
52,617
 
Indefinite
State licenses
   
7,727
     
     
7,727
 
Indefinite
Customer relationships
   
51,400
     
(12,199
)
   
39,201
 
15 years double declining
Net balance
 
$
111,744
   
$
(12,199
)
 
$
99,545
 
 
 
As at 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 and nine months ended September 30, 2010. The estimated amortization expense for the next five years is:
 
   
September 30,
2010
 
2010
 
$
1,452
 
2011
   
5,033
 
2012
   
4,362
 
2013
   
3,781
 
2014
   
3,276
 
 
 
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)

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  for a purchase price of $1,000.45 per Unit.  In the aggregate, 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.

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 September 30, 2010, the stated value of the Trust Preferred Securities was $215,173 which comprises the principal amount of $260,000 and unamortized discount of $44,827. Amortization expense for the three and nine months ended September 30, 2010 was $17 and $48, respectively (2009 - $14 and $38, respectively).
 
7. Shareholders’ Equity

In connection with the formation by Michael Karfunkel, George Karfunkel and Barry Zyskind (the “Founding Shareholders”), the Company issued to the Founding Shareholders 10-year warrants (the “Warrants”) to purchase up to an aggregate of 4,050,000 common shares of the Company at $10 per share. The warrants are effective as of June 14, 2007 and were to expire on June 14, 2017. The warrants were initially valued by an independent appraisal at an aggregate fair value of $19,521 which was recorded as an addition to additional paid-in capital with an offsetting charge to additional paid-in capital as well.

On September 20, 2010, the Company entered into Warrant Exchange Agreements, under which each of the Founding Shareholders agreed to surrender the warrants in exchange for a total of 1,800,000 of the Company’s common shares.  These common shares are restricted under Lockup Agreements under which the Founding Shareholders may not sell or transfer the shares awarded without the prior written consent of the Company for a period of 36 months following the exchange. The fair value of the warrants at the time of exchange was $2.06 per warrant or $8,343 while the fair value of the 1,800,000 restricted common shares issued was $4.56 per share or $8,208.  The terms of the exchange of the warrants and issuance of the common shares were negotiated and unanimously approved by the Audit and Compensation Committees of the Company’s Board of Directors.  In connection with their review, the Committees were advised by independent legal counsel and obtained an independent appraisal of the fair value of the warrants and the restricted common shares.  The issuance of the restricted common shares was recorded as an offset to additional paid-in-capital where the warrants were originally recorded.

 
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)
 
8. Earnings Per Share
 
The following is a summary of the elements used in calculating basic and diluted earnings per share: 
 
   
Three Months
Ended
September 30, 
2010
   
Three Months
Ended 
September 30,
 2009
   
Nine Months
Ended 
September 30,
2010
   
Nine Months
Ended 
September 30, 
2009
 
Net income available to common shareholders
  $
18,526
    $ 14,987     $ 50,732     $ 44,339  
Weighted average number of common shares outstanding – basic
    70,493,545       70,287,664       70,359,688       69,430,521  
Potentially dilutive securities:
                               
Warrants
                       
Share options
    491,837       565,231       483,774       416,193  
Weighted average number of common shares outstanding – diluted
    70,985,382       70,852,895      
70,843,462
      69,846,714  
Basic earnings per common share:
  $