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, 2011
 
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 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 May 6, 2011, the Registrant had one class of Common Stock ($.01 par value),
of which 72,107,197 shares were outstanding.
 
 
 

 
 
INDEX

   
Page
PART I - Financial Information
   
Item 1.   
 
Financial Statements
   
         
   
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
 
3
         
   
Condensed Consolidated Statements of Income  for the three months ended March 31, 2011 and 2010 (unaudited)
 
4
         
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the three months ended March 31, 2011 and 2010 (unaudited)
 
5
         
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)
 
7
         
   
Notes to Condensed Consolidated Financial Statements (unaudited)
 
8
         
Item 2.   
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
27
         
Item 3.   
 
Quantitative and Qualitative Disclosures About Market Risk
 
48
         
Item 4.  
 
Controls and Procedures
 
50
         
PART II - Other Information
   
Item 5.   
 
Other Information - Submission of Matters to a Vote of Security Holders
 
51
         
Item 6.   
 
Exhibits
 
52
         
   
Signatures
 
53
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share and per share data)
 
   
March 31,
 2011
   
December 31,
2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
 
 
   
 
 
Investments:
 
 
   
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2011:$1,803,375; 2010: $1,819,775)
  $ 1,861,299     $ 1,874,433  
Other investments, at fair value (Cost 2011: $5,993; 2010: $5,751)
    6,322       5,847  
Total investments
    1,867,621       1,880,280  
Cash and cash equivalents
    97,340       96,151  
Restricted cash and cash equivalents
    52,764       89,756  
Accrued investment income
    12,645       14,091  
Reinsurance balances receivable, net (includes $121,812 and $95,227 from related parties in 2011 and 2010, respectively)
    315,349       226,333  
Funds withheld
    164,533       152,713  
Prepaid reinsurance premiums (includes $3,282 and $1,211 from related parties in 2011 and 2010, respectively)
    31,488       28,992  
Reinsurance recoverable on unpaid losses (includes $1,931 and $383 from related parties in 2011 and 2010, respectively)
    11,435       6,656  
Loan to related party
    167,975       167,975  
Deferred acquisition costs (includes $123,404 and $118,015 from related parties in 2011 and 2010, respectively)
    234,253       203,631  
Goodwill and intangible assets, net
    102,543       103,905  
Other assets
    14,168       12,079  
Total assets
  $ 3,072,114     $ 2,982,562  
LIABILITIES
               
Reserve for loss and loss adjustment expenses (includes $284,554 and $263,916  from related parties in 2011 and 2010, respectively)
  $ 1,254,850     $ 1,226,773  
Unearned premiums (includes $384,808 and $366,412 from related parties in 2011 and 2010, respectively)
    764,264       657,556  
Accrued expenses and other liabilities
    67,815       56,368  
Securities sold under agreements to repurchase, at contract value
          76,225  
Junior subordinated debt
    215,209       215,191  
Total liabilities
    2,303,138       2,232,113  
Commitments and Contingencies
               
EQUITY
               
Common shares ($0.01 par value; 73,069,530 and 73,069,436 shares issued in 2011 and 2010, respectively; 72,107,194  and 72,107,100 shares outstanding in 2011 and 2010, respectively)
    731       731  
Additional paid-in capital
    577,478       577,135  
Accumulated other comprehensive income
    59,204       54,334  
Retained earnings
    136,070       121,775  
Treasury shares, at cost (2011 and 2010: 962,336 shares)
    (3,801 )        (3,801 )   
Total Maiden shareholders’ equity
    769,682       750,174  
Noncontrolling interest in subsidiary
    294       275  
Total equity
    769,976       750,449  
Total liabilities and equity
  $ 3,072,114     $ 2,982,562  
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
3

 
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
 
For the three months ended
 
March 31,
 2011
   
March 31,
 2010
 
Revenues:
           
Gross premiums written
  $ 470,777     $ 327,382  
Net premiums written
  $ 449,500     $ 311,291  
Change in unearned premiums
    (102,965     (47,362
Net earned premium
    346,535       263,929  
Other insurance revenue
    4,655        
Net investment income
    19,141       17,581  
Net realized and unrealized investment gains
    47       312  
Total revenues
    370,378       281,822  
Expenses:
               
Loss and loss adjustment expenses
    221,182       170,285  
Commission and other acquisition expenses
    107,072       77,396  
General and administrative expenses
    12,293       8,552  
Subordinated debt interest expense
    9,118       9,115  
Amortization of intangible assets
    1,258       1,452  
Foreign exchange (gains) losses
    (1,062     1,153  
Total expenses
    349,861       267,953  
Income before income taxes
    20,517       13,869  
Income taxes:
               
Current tax expense
    885        
Deferred tax expense
    287       300  
Income tax expense
    1,172       300  
Net income
    19,345       13,569  
Less: Income attributable to noncontrolling interest
    (3 )      
Net income attributable to Maiden
  $ 19,342     $ 13,569  
                 
Basic earnings per share attributable to Maiden shareholders
  $ 0.27     $ 0.19  
Diluted earnings per share attributable to Maiden shareholders
  $ 0.27     $ 0.19  
Dividends declared per common share
  $ 0.07     $ 0.065  
 
  See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
4

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in thousands of U.S. dollars)
(Unaudited)
 
               
Maiden Shareholders’ Equity
       
For the three months ended
March 31, 2011
 
Total
equity
   
Maiden
comprehensive
income
   
Retained
earnings
   
Treasury
shares
   
Accumulated
other
comprehensive
income
   
Common
shares
   
Additional
paid-in capital
   
Noncontrolling
interest in
subsidiary
 
Beginning balance
  $ 750,449    
 
    $ 121,775     $ (3,801 )   $ 54,334     $ 731     $ 577,135     $ 275  
Exercise of options and issuance of shares
    4                                             4        
Comprehensive income:
         
 
                                                 
Net income
    19,345     $ 19,342       19,342                                       3  
Other comprehensive income:
                                                               
Unrealized holdings net gains arising during the period
            3,546                                                
Adjustment for reclassification of net realized gains recognized in net income
            (47 )                                              
Change in net unrealized gains on investments
    3,499       3,499                       3,499                        
Foreign currency translation adjustment
    1,387       1,371                       1,371                       16  
Other comprehensive income
    4,886       4,870                                               16  
Comprehensive income
    24,231     $ 24,212                                               19  
Share based compensation
    339                                               339        
Dividends on common shares
    (5,047 )             (5,047 )                                              
Ending balance
  $ 769,976             $ 136,070     $ (3,801 )   $ 59,204     $ 731     $ 577,478     $ 294  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
5

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in thousands of U.S. dollars)
(Unaudited)
 
               
Maiden Shareholders’ Equity
       
For the three months ended
March 31, 2010
 
Total
equity
   
Maiden
comprehensive
income
   
Retained
earnings
   
Treasury
shares
   
Accumulated
other
comprehensive
income
   
Common
shares
   
Additional
paid-in capital
   
Noncontrolling
interest in
subsidiary
 
Beginning balance
  $ 676,526    
 
    $ 70,781     $ (3,801 )   $ 32,747     $ 713     $ 576,086     $  
Exercise of options and issuance of shares
    2    
 
                                      2        
Comprehensive income:
         
 
                                                 
Net income
    13,569     $ 13,569       13,569                                        
Other comprehensive income:
                                                               
Unrealized holdings net gains arising during the period
            24,524                                                
Adjustment for reclassification of net realized gains recognized in net income
            (312 )                                                
Change in net unrealized gains on investments
    24,212       24,212                       24,212                        
Comprehensive income
    37,781     $ 37,781                                                
Share based compensation
    210                                               210        
Dividends on common shares
    (4,569 )                (4,569                                              
Ending balance
  $ 709,950             $ 79,781     $ (3,801 )   $ 56,959     $ 713     $ 576,298     $  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
6

 
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
(Unaudited)
 
For the three months ended March 31, 
  2011     2010  
Cash flows from operating activities:
               
Net income
 
$
19,345
   
$
13,569
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization of intangibles
   
1,680
     
1,749
 
Net realized and unrealized (gain) loss on investments
   
(47
)
   
(312
Foreign exchange (gains)  losses
   
(1,062
   
1,153
 
Amortization of share-based compensation expense, bond premium and discount junior subordinated debt discount, net
   
437
     
(1,334
)
Changes in assets - (increase) decrease:
               
Reinsurance balances receivable, net
   
(88,539
)
   
(87,416
)
Funds withheld
   
(4,233
)
       
Prepaid reinsurance premiums
   
(2,083
)
   
2,484
 
Accrued investment income
   
1,446
     
(1,177
)
Deferred commission and other acquisition costs
   
(30,162
)
   
(5,271
)
Other assets
   
(2,283
   
(270
)
Changes in liabilities – increase (decrease):
               
Reserve for loss and loss adjustment expenses
   
17,978
     
38,252
 
Unearned premiums
   
105,122
     
46,462
 
Accrued expenses and other liabilities
   
(3,932
   
(10,717
)
Net cash provided by (used in) operating activities
   
13,667
     
(2,828
)
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities – available-for-sale
   
(156,737
)
   
(205,443
)
Purchases of other investments
   
(241
)
   
 
Sale of investments:
               
Proceeds from sales of fixed-maturity securities – available-for-sale
   
13,686
     
37,737
 
Proceeds from maturities and calls of fixed-maturity securities
   
175,023
     
123,558
 
Proceeds from redemption of other investments
   
     
3
 
Decrease in restricted cash and cash equivalents
   
36,992
     
27,305
 
Purchase of capital assets
   
(717
)
   
(673
)
Net cash provided by (used in) investing activities
   
68,006
     
(17,513
)
Cash flows from financing activities:
               
Repurchase agreements, net
   
(76,225
)
   
(19,077
)
Common share issuance
   
4
     
2
 
Dividend paid
   
(5,047
)
   
(4,569
)
Net cash used in financing activities
   
(81,268
)
   
(23,644
Effect of exchange rate changes on foreign currency cash
   
784
     
(668
Net increase (decrease) in cash and cash equivalents
   
1,189
     
(44,653
Cash and cash equivalents, beginning of period
   
96,151
     
107,396
 
Cash and cash equivalents, end of period
 
$
97,340
   
$
62,743
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
  
 
7

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share 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 (the “Company”) 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, 2010.
 
Certain reclassifications have been made for 2010 to conform to the 2011 presentation and have no impact on net income previously reported.
 
2. Recent Accounting Pronouncements

Adoption of Accounting Standards Updates  
 
Intangibles — Goodwill and Other
 
In December 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance that modifies the goodwill impairment test.   Under the updated guidance, goodwill is tested for impairment using a two-step process.  The first step is to identify potential impairments by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step is performed to measure the amount of impairment, if any.   The second step is to determine the implied fair value of the reporting unit’s goodwill, measured in the same manner as goodwill is recognized in a business combination, and compare the implied fair value with the carrying amount of the goodwill.   If the carrying amount exceeds the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.
 
The updated guidance requires that, if the carrying amount of a reporting unit becomes zero or negative, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment loss exists.  In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the factors presented in existing guidance that trigger an interim impairment test of goodwill (e.g., a significant adverse change in business climate or an anticipated sale of a reporting unit).  The provisions of the guidance were effective for annual and interim periods beginning after December 15, 2010.  The adoption of this guidance in January 2011 did not have any effect on the Company’s results of operations, financial position or liquidity.
 
 
8

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)

2. Recent Accounting Pronouncements (continued)
 
Accounting Standards Not Yet Adopted
 
 Deferred Acquisition Costs
 
In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective on either a retrospective or 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 this new guidance on our consolidated results of operations and financial condition.
 
Repo Accounting
 
On April 29, 2011, the FASB amended its guidance on accounting for repurchase agreements. The amendments simplify the accounting by eliminating the requirement that the transferor demonstrate it has adequate collateral to fund substantially all the cost of purchasing replacement assets. Under the amended guidance, a transferor maintains effective control over transferred financial assets (and thus accounts for the transfer as a secured borrowing) if there is an agreement that both entitles and obligates the transferor to repurchase the financial assets before maturity and if all of the following conditions previously required are met; (i) financial assets to be repurchased or redeemed are the same or substantially the same as those transferred, (ii) repurchase or redemption date before maturity at a fixed or determinable price, and (iii) the agreement is entered into contemporaneously with, or in contemplation of, the transfer.  As a result, more arrangements could be accounted for as secured borrowings rather than sales.  The updated guidance is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited. We are currently evaluating the impact of the adoption of this new guidance on our consolidated results of operations and financial condition.
 
 
9

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
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, 2011 and December 31, 2010 are as follows:
 
As of March 31, 2011
 
Original or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Fixed Maturities:
   
  
     
  
     
  
     
  
 
U.S. treasury bonds
 
$
92,040
   
$
891
   
$
(1,963
)
 
$
90,968
 
U.S. agency bonds – mortgage backed
   
958,552
     
20,464
     
(6,290
)
   
972,726
 
U.S. agency bonds – other
   
18,711
     
1,406
     
     
20,117
 
Non-U.S. government bonds
   
15,479
     
1,049
     
     
16,528
 
Corporate bonds
   
656,101
     
49,091
     
(6,426
)
   
698,766
 
Municipal bonds
   
62,492
     
539
     
(837
)
   
62,194
 
Total available for sale fixed maturities
   
1,803,375
     
73,440
     
(15,516
)
   
1,861,299
 
Other investments
   
5,993
     
329
     
     
6,322
 
Total investments
 
$
1,809,368
   
$
73,769
   
$
(15,516
)
 
$
1,867,621
 
 
As of December 31, 2010
 
Original or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Fixed Maturities:
   
  
     
  
     
  
     
  
 
U.S. treasury bonds
 
$
92,043
   
$
1,108
   
$
(1,422
)   
 
$
91,729
 
U.S. agency bonds – mortgage backed
   
951,465
     
22,351
     
(4,348
)   
   
969,468
 
U.S. agency bonds – other
   
41,770
     
1,638
     
     
43,408
 
Non-U.S. government bonds
   
15,494
     
444
     
     
15,938
 
Corporate bonds
   
673,756
     
46,647
     
(11,410
)   
   
708,993
 
Municipal bonds
   
45,247
     
441
     
(791
)   
   
44,897
 
Total available for sale fixed maturities
   
1,819,775
     
72,629
     
(17,971
)   
   
1,874,433
 
Other investments
   
5,751
     
96
     
     
5,847
 
Total investments
 
$
1,825,526
   
$
72,725
   
$
(17,971
)   
 
$
1,880,280
 

The contractual maturities of our fixed maturities as of March 31, 2011 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations prior to contractual maturity.
 
As of March 31, 2011
 
Amortized
 Cost
   
Fair
Value
   
% of Total
Fair Value
 
Maturity
                 
Due in one year or less
  $ 41,151     $ 41,665       2.2 %
Due after one year through five years
    163,951       170,800       9.2 %
Due after five years through ten years
    548,738       579,951       31.2 %
Due after ten years
    90,983       96,156       5.2 %
      844,823       888,572       47.8 %
U.S. agency bonds – mortgage backed
    958,552       972,727       52.2 %
Total
  $ 1,803,375     $ 1,861,299       100.0 %
 
 
10

 

MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
3. Investments (continued)

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 of March 31, 2011
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
                                   
U.S. treasury bonds
  $ 46,655     $ (1,963 )   $     $     $ 46,655     $ (1,963 )
U.S. agency bonds – mortgage backed
    294,289       (6,290 )                    294,289       (6,290 )   
Corporate bonds
    50,016       (1,255 )        172,202       (5,171 )        222,218       (6,426 )   
Municipal bonds
    20,731       (837 )                    20,731       (837 )   
Total temporarily impaired available-for-sale securities
  $ 411,691     $ (10,345 )   $ 172,202     $ (5,171 )   $ 583,893     $ (15,516 )
 
As of March 31, 2011, there were approximately 29 securities in an unrealized loss position with a fair value of $583,893 and unrealized losses of $15,516. Of these securities, there are 9 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $172,202 and unrealized losses of $5,171.
 
   
Less than 12 Months
 
12 Months or More
 
Total
As of December 31, 2010
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Available-for-sale securities:
                                               
U.S. treasury bonds
 
$
47,165
   
$
(1,422
)   
 
$
   
$
   
$
47,165
   
$
(1,422
)   
U.S. agency bonds – mortgage backed
   
315,370
     
(4,348
)   
   
     
     
315,370
     
(4,348
)   
Corporate bonds
   
86,976
     
(1,555
)   
   
166,062
     
(9,855
)   
   
253,038
     
(11,410
)   
Municipal bonds
   
27,315
     
(791
)   
   
     
     
27,315
     
(791
)   
Total temporarily impaired available-for-sale securities
 
$
476,826
   
$
(8,116
)   
 
$
166,062
   
$
(9,855
)   
 
$
642,888
   
$
(17,971
)   

As of December 31, 2010, there were approximately 32 securities in an unrealized loss position with a fair value of $642,888 and unrealized losses of $17,971. Of these securities, there are 9 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $166,062 and unrealized losses of $9,855.

  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, 2011, 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 months ended March 31, 2011 and 2010, the Company recognized no other than temporary impairment. 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, 2011 were primarily due to widening of credit spreads relating to the market illiquidity, rather than credit events. Because we do not intend to sell these securities and it is not more likely than not that we will 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, 2011.

 
11

 

MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
3. Investments (continued)
 
(b) Other Investments
 
 
The table below shows our portfolio of other investments:
 
   
March 31, 2011
 
December 31, 2010
Hedge fund
 
$
4,935
     
78.1
%
 
$
4,846
     
82.9
%
Investments in limited partnerships
   
1,387
     
21.9
%
   
1,001
     
17.1
%
Total other investments
 
$
6,322
     
100.0
%
 
$
5,847
     
100.0
%
 
 
The Company has an unfunded commitment on its investments in limited partnerships of approximately $4,613 as of March 31, 2011.

 (c) 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 and unrealized gains and losses for the three months ended March 31, 2011 and 2010:
 
For the three months ended March 31, 2011
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
63
   
$
(16
)
 
$
47
 
Other investments
   
     
     
 
Net realized and unrealized gains
 
$
63
   
$
(16
)
 
$
47
 

For the three months ended March 31, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
 
$
312
   
$
   
$
312
 
Other investments
   
     
     
 
Net realized and unrealized gains
 
$
312
   
$
   
$
312
 

 Proceeds from sales of fixed maturities classified as available-for-sale were $13,686 and $37,737 for the three months ended March 31, 2011 and 2010, respectively.
 
Net unrealized gain (loss) on available-for-sale securities and other investments was as follows:
 
   
March 31,
2011
   
March 31,
2010
 
Fixed maturities
  $ 57,924     $ 57,039  
Other investments
    329       (80 )
Net unrealized gains
  $ 58,253     $ 56,959  
Change in unrealized gain
  $ 3,499     $ 24,212  
 
 
12

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
3. Investments (continued)
 
(d) 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:
 
 
   
March 31,
 2011
   
December 31,
 2010
 
Restricted cash – third party agreements
  $ 39,935     $ 59,615  
Restricted cash – related party agreements
    12,455       29,743  
Restricted cash – U.S. state regulatory authorities
    374       398  
Total restricted cash
    52,764       89,756  
Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2011 – $1,064,733; 2010 – $1,024,895)
    1,081,291       1,053,982  
Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2011 – $373,430; 2010 – $339,810)
    397,531       361,424  
Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2011 – $13,195; 2010 – $13,198)
    13,591       13,690  
Total restricted investments
    1,492,413       1,429,096  
Total restricted cash and investments
  $ 1,545,177     $ 1,518,852  
 
(e) 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. During the period, the Company repaid the entire balance outstanding of $76,225. Interest expense associated with these repurchase agreements was $756 and $57 for the three months ended March 31, 2011 and 2010, respectively, out of which $0 was accrued as of March 31, 2011 (December 31, 2010 - $702).
 
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.
 
 
13

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)

4. Fair Value of Financial Instruments (continued)
 
The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of March 31, 2011.
 
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, Federal Farm Credit Bank, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe 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 priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
 
Non-U.S. government bonds:   Comprised of Non-U.S. government bonds issued primarily by Germany, Belgium and Netherlands. These 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 spreads, interest rate data and market/sector news. As the significant inputs used to price Non-U.S. government bonds are observable market inputs, the fair values of Non-U.S. government bonds are included in the Level 2 fair value hierarchy.
 
Corporate Bonds:   Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher provided that, in aggregate, corporate bonds with ratings of BBB-/Baa3 do not constitute more than 5% of the market value of our fixed income securities and are diversified across a wide range of issuers and industries. These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate (“LIBOR”) yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
 
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share 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 March 31, 2011 and December 31, 2010:
 
As of March 31, 2011
 
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
  $ 90,968     $     $     $ 90,968  
U.S. agency bonds – mortgage backed
          972,726             972,726  
U.S. agency bonds – other
          20,117             20,117  
Non U.S. government bonds
          16,528             16,528  
Corporate bonds
          698,766             698,766  
Municipal bonds
          62,194             62,194  
Other investments
                6,322       6,322  
Total
  $ 90,968     $ 1,770,331     $ 6,322     $ 1,867,621  
As a percentage of total assets
    3.0 %     57.6 %     0.2 %     60.8 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $     $     $  
As a percentage of total liabilities
                       
 
As of December 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
  $ 91,729     $     $     $ 91,729  
U.S. agency bonds – mortgage backed
          969,468             969,468  
U.S. agency bonds – other
          43,408             43,408  
Non U.S. government bonds
          15,938             15,938  
Corporate bonds
          708,993             708,993  
Municipal bonds
          44,897             44,897  
Other investments
                5,847       5,847  
Total
  $ 91,729     $ 1,782,704     $ 5,847     $ 1,880,280  
As a percentage of total assets
    3.1 %     59.7 %     0.2 %     63.0 %
Liabilities
                                       
Securities sold under agreements to repurchase
  $     $ 76,225     $     $ 76,225  
As a percentage of total liabilities
          3.4 %              3.4 %   
 
 
15

 

MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share 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 months ended March 31, 2011 and 2010:
 
Other Investments:
 
For the three months
ended
March 31, 2011
   
For the three months
ended
March 31, 2010
 
Balance at beginning of period
 
$
5,847
   
$
5,549
 
Net realized and unrealized gains – included in net income
   
     
 
Net realized and unrealized losses – included in net income
   
     
 
Change in net unrealized gains – included in other comprehensive income (loss)
   
234
     
 
Change in net unrealized losses – included in other comprehensive income (loss)
   
     
55
 
Purchases
   
241
     
 
Sales and redemptions
   
     
(3
Transfers into Level 3
   
     
 
Transfers out of Level 3
   
     
 
Balance at end of period
 
$
6,322
   
$
5,601
 
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
 
$
   
$
 
 
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 March 31, 2011 and December 31, 2010:
 
As of March 31, 2011
 
Gross
 
Accumulated Amortization
 
Net
 
Useful Life
Goodwill
 
$
58,325
   
$
   
$
58,325
   
Indefinite
State licenses
   
7,727
     
     
7,727
   
Indefinite
Customer relationships
   
51,400
     
(14,909
)   
   
36,491
   
15 years double declining
Net balance
 
$
117, 452
   
$
(14,909
)   
 
$
102,543
     
 
 
16

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)

5. Goodwill and Intangible Assets (continued)

As of December 31, 2010
 
Gross
 
Accumulated Amortization
 
Net
 
Useful Life
Goodwill
 
$
58,429
   
$
   
$
58,429
   
Indefinite
State licenses
   
7,727
     
     
7,727
   
Indefinite
Customer relationships
   
51,400
     
(13,651
)   
   
37,749
   
15 years double declining
Net balance
 
$
117,556
   
$
(13,651
)   
 
$
103,905
     

The goodwill and intangible assets were recognized as a result of the IIS Acquisition and 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, 2011 and 2010. The estimated amortization expense for the next five years is:

   
March 31, 2011
 
2011
 
$
3,775
 
2012
   
4,362
 
2013
   
3,781
 
2014
   
3,276
 
2015
   
2,840
 
 
6. Junior Subordinated Debt
 
On January 20, 2009, the Company completed a private placement of 260,000 units (the “Units”), 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 (the “TRUPS Offering”).  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, 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 Debenture and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%.
 
 
17

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
6. Junior Subordinated Debt (continued)

As of March 31, 2011, the stated value of the Trust Preferred Securities was $215,209 which comprises the principal amount of $260,000 and unamortized discount of $44,791. Amortization expense for the three months ended March 31, 2011 and 2010 was $18 and $15, respectively.
 
7. Earnings per Common Share
 
The following is a summary of the elements used in calculating basic and diluted earnings per common share: 
 
   
For the three months
ended
March 31, 2011
   
For the three months
ended 
March 31, 2010
 
Net income available to Maiden common shareholders
 
$
19,342
   
$
13,569
 
Weighted average number of common shares outstanding – basic
   
72,107,194
     
70,291,312
 
Potentially dilutive securities:
               
Warrants
   
     
 
Share options
   
666,720
     
485,482
 
Weighted average number of common shares outstanding – diluted
   
72,773,914
     
70,776,794
 
Basic earnings per common share:
 
$
0.27
   
$
0.19
 
Diluted earnings per common share:
 
$
0.27
   
$
0.19
 
 
As of March 31, 2011, no warrants (March 31, 2010 – 4,050,000) and 2,249,670 share options (March 31, 2010 – 1,584,964) were excluded from the calculation of diluted earnings per common 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 $339 and $210 for the three months ended March 31, 2011 and 2010, respectively. 
 
The key assumptions used in determining the fair value of options granted in the three months ended March 31, 2011 and a summary of the methodology applied to develop each assumption are as follows:  

 
Assumptions:
 
March 31, 2011
 
Volatility
   
29.8-46.0
%
Risk-free interest rate
   
1.62-3.30
%
Weighted average expected lives in years
 
5-6.1 years
 
Forfeiture rate
   
0
%
Dividend yield rate
   
1-5.39
%
 
 
18

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share 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 tables show all options granted, exercised, expired and exchanged under the Plan for the three months ended March 31, 2011 and 2010:
 
For the three months ended March 31, 2011
 
Number of
Share Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, December 31, 2010
   
2,940,876
   
$
6.41
   
8.40 years
 
Granted
   
7,500
     
7.69
   
9.95 years
 
Exercised
   
(998
   
3.28
     
 
Cancelled
   
(41,313
)
   
7.21
     
 
Outstanding, March 31, 2011
   
2,906,065
   
$
6.41
   
8.13 years
 

For the 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 weighted average grant date fair value was $1.92 and $1.76 for all options outstanding at March 31, 2011 and 2010, respectively. There was approximately $3,002 and $2,647 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of March 31, 2011 and 2010, respectively.
 
9. Dividends Declared
 
On March 1, 2011, the Company’s Board of Directors approved a quarterly cash dividend of $0.07 per common share. This dividend was paid on April 15, 2011 to shareholders of record on April 1, 2011.
 
 
19

 

MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)

10. Related Party Transactions
 
The Founding Shareholders of Maiden Holdings Ltd., 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, 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 Bermuda”), a wholly-owned subsidiary of the Company, to enter into a quota share reinsurance agreement (the “Reinsurance Agreement”) by which (a) AII retrocedes to Maiden Bermuda 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, AmTrust Europe, Limited, net of commissions) and 40% of losses and (b) AII transferred to Maiden Bermuda 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 Bermuda 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 had 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 Bermuda 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 Bermuda, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Bermuda 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 Bermuda 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 Bermuda 40% of net premium written, effective as of June 1, 2008. Maiden Bermuda 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 Bermuda amended the Reinsurance Agreement to clarify that (i) AII would offer Maiden Bermuda 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 $5,000 and (ii) the deduction for the cost of inuring reinsurance from Affiliate Subject Premium (as defined in the Reinsurance Agreement) retroceded to Maiden Bermuda is net of ceding commission.

The Company recorded approximately $35,806 and $34,765 of ceding commission expense for the three months ended March 31, 2011 and 2010, respectively, as a result of this transaction.

Other Reinsurance Agreements
 
Effective January 1, 2008, Maiden Bermuda and AmTrust entered into an agreement to reinsure a 45% participation in the $9,000 in excess of $1,000 layer of AmTrust’s workers’ compensation excess of loss program. This layer provides reinsurance to AmTrust for losses per occurrence in excess of $1,000 up to $10,000, subject to an annual aggregate deductible of $1,250. 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.

 
20

 


MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
  
10. Related Party Transactions (continued)

This coverage expired on January 1, 2010; as a result, under the Master Agreement, Maiden Bermuda therefore now reinsures 40% of the subject workers’ compensation business up to $10,000, subject to certain additional inuring reinsurance protection AmTrust has purchased.

As of January 1, 2008, Maiden Bermuda had a 50% participation in a $4,000 in excess of $1,000 specialty transportation program written by AmTrust. Starting January 1, 2009, we had a 30% participation in a $4,000 in excess of $1,000 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.

 Effective September 1, 2010, the Company through its wholly-owned subsidiary, Maiden Specialty Insurance Company (“Maiden Specialty”), entered into a quota share reinsurance agreement with Technology Insurance Company, Inc., a subsidiary of AmTrust (“Technology”). Under the agreement, Maiden Specialty will cede (a) 90% of its credit insurance business written under the Open Lending Program (“OPL”) and (b) 100% of its general liability business under the Naxos Avondale Specialty Casualty Program (“NAXS”). Maiden Specialty’s involvement is limited to certain states where Technology is not fully licensed. The agreement also provides that Maiden Specialty receives a ceding commission of 5% of ceded written premiums. The reinsurance agreement has a term of three years and will remain continuously in force until terminated in accordance to the provisions set forth in the contract. Maiden Specialty recorded approximately $502 and $147 of premiums earned ceded and ceding commission, respectively, for the three months ended March 31, 2011.

Effective September 1, 2010, the Company, through its subsidiary, Maiden Reinsurance Company (“Maiden US”), entered into a reinsurance agreement with Security National Insurance Company (“SNIC”), a subsidiary of AmTrust. Under the agreement, SNIC will cede 80% of the gross liabilities produced under the Southern General Agency program to Maiden US. The agreement provides SNIC with a 5% commission of ceded written premiums. The agreement has a term of one year. Under this agreement, Maiden US recorded approximately $7 and $0.1 of premiums earned and commission expense, respectively, for the three months ended March 31, 2011.

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 Bermuda has agreed to provide appropriate collateral to secure its proportional share under the Reinsurance Agreement of AII’s obligations to the AmTrust subsidiaries to whom AII is required to provide collateral. In addition, if collateral is required to be provided to any AmTrust subsidiary under applicable law or regulatory requirements, Maiden Bermuda will provide collateral to the extent required, although Maiden Bermuda does not expect that such collateral will be required unless an AmTrust subsidiary is domiciled in the United States.

 Maiden Bermuda satisfied its collateral requirements under the Quota Share Agreement with AII as follows:
 
 
·
by lending funds in the amount of $167,975 as of March 31, 2011 and December 31, 2010 to AII pursuant to a loan agreement entered into between those parties. This loan is carried at cost. The amount of collateral Maiden Bermuda 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 Bermuda’s assets with AII’s other assets and to cause the AmTrust subsidiaries not to commingle Maiden Bermuda’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 Bermuda its proportionate share of such excess assets. AII has further agreed that if the aggregate fair market value of the amount of Maiden Bermuda’s assets held in the Trust Account exceeds Maiden Bermuda’s proportionate share of AII’s obligations, or if an AmTrust subsidiary misapplies any such collateral, AII will immediately return to Maiden Bermuda an amount equal to such excess or misapplied collateral, less any amounts AII has paid to Maiden Bermuda. In addition, if an AmTrust subsidiary withdraws Maiden Bermuda’s assets from a Trust Account and maintains those assets on its books as withheld funds, AII has agreed to pay to Maiden Bermuda interest at the rate equivalent to the one-month LIBOR plus 90 basis points per annum computed on the basis of a 360-day year on the loan (except to the extent Maiden Bermuda’s proportionate share of AII’s obligations to that AmTrust subsidiary exceeds the value of the collateral Maiden Bermuda has provided). The amount of accrued interest relating to the loan was $486 and $496 as of March 31, 2011 and December 31, 2010, respectively.
 
 
21

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
10. Related Party Transactions (continued)
 
 
·
by entering into a Reinsurer Trust Assets Collateral agreement. The amount of the collateral, as of March 31, 2011 was approximately $366,475 (December 31, 2010 – $358,621) and the accrued interest was $3,742 (December 31, 2010 – $3,684).
 
Reinsurance Brokerage Agreements
 
Effective July 1, 2007, the Company entered into a reinsurance brokerage agreement with AII Reinsurance Broker Ltd. (“AIIB”), a subsidiary of AmTrust. Pursuant to the brokerage agreement, AIIB provides brokerage services relating to the Reinsurance Agreement for a fee equal to 1.25% of the premium reinsured from AII. The brokerage fee is payable in consideration of AIIB’s brokerage services. AIIB is not the Company’s exclusive broker.  AIIB 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 $1,431 and $1,383 of reinsurance brokerage expense for the three months ended March 31, 2011 and 2010, respectively and deferred reinsurance brokerage of $3,705 and $3,552 as of March 31, 2011 and December 31, 2010, respectively, as a result of this agreement.
  
The Company paid brokerage fees to AmTrust North America of $37 and $20 for the three months ended March 31, 2011 and 2010, respectively, for acting as insurance intermediary in relation to certain insurance placements.

Asset Management Agreement
 
Effective July 1, 2007, 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 quarterly fee has been reduced to 0.05% if the average value of the account is less than or equal to $1billion and 0.0375% if the average value of the account for the previous calendar quarter is greater than $1 billion. The Company recorded approximately $793 and $656 of investment management fees for the three months ended March 31, 2011 and 2010, respectively, as a result of this agreement.

The following describes transactions between the Company and ACAC:

ACAC Quota Share Reinsurance Agreement
 
On March 1, 2010, Maiden Bermuda 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 is controlled by Michael Karfunkel (“Karfunkel”), individually, and AmTrust.  ACAC, on March 1, 2010, acquired from GMAC Insurance Holdings, Inc. and Motors Insurance Corporation (“Motors”) (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.

The Company, effective March 1, 2010, reinsures 25% of the net premiums of the GMAC personal lines business, pursuant to a quota share reinsurance agreement (“ACAC Quota Share”) with the GMAC personal lines insurance companies, as cedents, and Maiden Bermuda, American Capital Partners Re, Ltd., a Bermuda reinsurer which is a wholly-owned indirect 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, Maiden Bermuda’s participation in the ACAC Quota Share may be terminated by ACAC on 60 days written notice in the event Maiden Bermuda 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. Maiden Bermuda 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 Maiden Bermuda’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.
 
 
22

 


MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
 (Unaudited)
 
10. Related Party Transactions (continued)
 
Maiden Bermuda’s recorded approximately $17,637 and $679 of ceding commission expense for the three months ended March 31, 2011 and March 31, 2010, respectively, as a result of this transaction.
 
Other

Maiden Specialty entered into a reinsurance arrangement with New South Insurance Company (“New South”). New South is a wholly owned subsidiary of ACAC. Pursuant to the agreement, Maiden Specialty cedes 100% of certain personal lines business to New South. On March 1, 2010, Maiden Specialty entered into a novation agreement with Motors and New South whereby New South replaced Motors as the reinsurer for all of this business. Maiden Specialty recorded approximately $0.5 and $0.2 of ceded premium and ceding commissions, respectively, for the three months ended March 31, 2011 (March 31, 2010 - $93 and $6, respectively).

 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, funds withheld, prepaid reinsurance premiums, reinsurance recoverable on unpaid losses, deferred commissions and acquisition cost, loans, goodwill and intangibles, and restricted cash and investments. All remaining assets are allocated to Corporate.

 
23

 
 
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share 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, 2011
 
Diversified
Reinsurance
   
AmTrust
Quota Share
   
ACAC
Quota Share
   
Total
 
Net premiums written
 
$
258,818
   
$
126,714
   
$
63,968
   
$
449,500
 
Net premiums earned
   
174,234
     
114,474
     
57,827
     
346,535
 
Other insurance revenue
   
4,655
     
     
     
4,655
 
Net losses and loss expenses
   
(110,345
)
   
(73,539
)
   
(37,298
)
   
(221,182
)
Commissions and other acquisition costs
   
(51,420
)
   
(37,237
)
   
(18,415
)
   
(107,072
)
General and administrative expenses
   
(8,028
)
   
(668
)
   
(543
   
(9,239
)
Underwriting income
 
$
9,096
   
$
3,030
   
$
1,571
   
$
13,697
 
                                 
Reconciliation to net income
                               
Net investment income and realized and unrealized investment gains (losses)
                           
19,188
 
Amortization of intangible assets
                           
(1,258
)
Foreign exchange gains
                           
1,062
 
Subordinated debt interest expense
                           
(9,118
)
Other general and administrative expenses
                           
(3,054
)
Income tax expense
                           
(1,172
)
Income attributable to noncontrolling interest
                           
(3
)
Net Income attributable to Maiden
                         
$
19,342
 
                                 
Net loss and loss expense ratio*
   
61.7
%
   
64.2
%
   
64.5
%
   
63.0
%
Acquisition cost ratio**
   
28.7
%
   
32.5
%
   
31.8
%
   
30.5
%
General and administrative expense ratio***
   
4.5
%
   
0.7
%
   
1.0
%
   
3.5
%
Combined ratio****
   
94.9
%
   
97.4
%
   
97.3
%
   
97.0
%

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