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 June 30, 2011
 
¨
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 ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ¨
 
Accelerated filer x
     
Non-accelerated filer   ¨ (Do not check if a smaller reporting
company)
 
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ¨ No x
 
As of August 1, 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 June 30, 2011 (unaudited) and December 31, 2010
3
     
 
Condensed Consolidated Statements of (Loss) Income  for the three and six months ended June 30, 2011 and 2010 (unaudited)
4
     
 
Condensed Consolidated Statements of Comprehensive (Loss) Income  for the three and six months ended June 30, 2011 and 2010 (unaudited)
5
     
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010 (unaudited)
6
     
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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
32
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
     
Item 4.
Controls and Procedures
60
     
PART II - Other Information
 
     
Item 1
Legal Proceedings
61
     
Item 1A.
Risk Factors
61
     
Item 6.
Exhibits
62
     
 
Signatures
63
 
 
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)
 
   
June 30, 2011
(Unaudited)
   
December 31, 2010
(Audited)
 
ASSETS
           
Investments:
           
Fixed maturities, available-for-sale, at fair value (Amortized cost 2011:$1,774,615; 2010: $1,819,775)
  $ 1,850,779     $ 1,874,433  
Fixed maturities, trading, at fair value (Amortized cost 2011:$50,172)
    49,860        
Other investments, at fair value (Cost 2011: $1,783; 2010: $5,751)
    1,962       5,847  
Total investments
    1,902,601       1,880,280  
Cash and cash equivalents
    198,356       96,151  
Restricted cash and cash equivalents
    67,207       89,756  
Accrued investment income
    12,294       14,091  
Reinsurance balances receivable, net (includes $185,563 and $95,227 from related parties in 2011 and 2010, respectively)
    379,806       226,333  
Funds withheld
    145,515       152,713  
Prepaid reinsurance premiums (includes $5,891 and $1,211 from related parties in 2011 and 2010, respectively)
    37,555       28,992  
Reinsurance recoverable on unpaid losses (includes $2,200 and $383 from related parties in 2011 and 2010, respectively)
    15,587       6,656  
Loan to related party
    167,975       167,975  
Deferred acquisition costs (includes $134,109 and $118,015 from related parties in 2011 and 2010, respectively)
    245,423       203,631  
Goodwill and intangible assets, net
    101,284       103,905  
Other assets
    19,688       12,079  
Total assets
  $ 3,293,291     $ 2,982,562  
LIABILITIES
               
Reserve for loss and loss adjustment expenses (includes $317,316 and $263,916  from related parties in 2011 and 2010, respectively)
  $ 1,279,709     $ 1,226,773  
Unearned premiums (includes $466,258 and $366,412 from related parties in 2011 and 2010, respectively)
    841,017       657,556  
Accrued expenses and other liabilities
    90,206       56,368  
Securities sold under agreements to repurchase, at contract value
          76,225  
Senior notes
    107,500        
Junior subordinated debt
    215,228       215,191  
Total liabilities
    2,533,660       2,232,113  
Commitments and Contingencies
               
EQUITY
               
Common shares ($0.01 par value; 73,112,966 and 73,069,436 shares issued in 2011 and 2010, respectively; 72,150,630 and 72,107,100 shares outstanding in 2011 and 2010, respectively)
    731       731  
Additional paid-in capital
    577,904       577,135  
Accumulated other comprehensive income
    77,848       54,334  
Retained earnings
    106,654       121,775  
Treasury shares, at cost (2011 and 2010: 962,336 shares)
    (3,801 )     (3,801 )
Total Maiden shareholders’ equity
    759,336       750,174  
Noncontrolling interest in subsidiary
    295       275  
Total equity
    759,631       750,449  
Total liabilities and equity
  $ 3,293,291     $ 2,982,562  
See accompanying notes to the unaudited condensed consolidated financial statements.

 
3

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
 
   
For the three
months ended
June 30, 2011
   
For the three
months ended
June 30, 2010
   
For the six
months ended
June 30, 2011
   
For the six
months ended
June 30, 2010
 
Revenues:
                       
Gross premiums written
  $ 462,395     $ 334,784     $ 933,172     $ 662,166  
Net premiums written
  $ 436,966     $ 313,050     $ 886,466     $ 624,341  
Change in unearned premiums
    (69,183 )     (29,266 )     (172,148 )     (76,628 )
Net premiums earned
    367,783       283,784       714,318       547,713  
Other insurance revenue
    2,179             6,834        
Net investment income
    19,818       18,875       38,959       36,456  
Net realized and unrealized investment gains (losses)
    591       535       638       847  
Total revenues
    390,371       303,194       760,749       585,016  
Expenses:
                               
Net loss and loss adjustment expenses
    250,599       175,354       471,781       345,639  
Commission and other acquisition expenses
    105,824       88,447       212,896       165,843  
General and administrative expenses
    12,839       9,484       25,132       18,036  
Interest and amortization expenses
    9,292       9,116       18,410       18,231  
Accelerated amortization of junior subordinated debt discount and issuance cost
    20,313             20,313        
Junior subordinated debt repurchase expense
    15,050             15,050        
Amortization of intangible assets
    1,259       1,452       2,517       2,904  
Foreign exchange (gains) losses
    (939 )     414       (2,001 )     1,567  
Total expenses
    414,237       284,267       764,098       552,220  
(Loss) income before income taxes
    (23,866 )     18,927       (3,349 )     32,796  
Income taxes:
                               
Current tax expense
    211             1,096        
Deferred tax expense
    295       290       582       590  
Income tax expense
    506       290       1,678       590  
Net (loss) income
    (24,372 )     18,637       (5,027 )     32,206  
Less: Loss attributable to noncontrolling interest
    6             3        
Net (loss) income attributable to Maiden
  $ (24,366 )   $ 18,637     $ (5,024 )   $ 32,206  
                                 
Basic (loss) earnings per share attributable to Maiden shareholders
  $ (0.34 )   $ 0.27     $ (0.07 )   $ 0.46  
Diluted (loss) earnings per share attributable to Maiden shareholders
  $ (0.34 )   $ 0.26     $ (0.07 )   $ 0.46  
Dividends declared per common share
  $ 0.07     $ 0.065     $ 0.14     $ 0.13  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
4

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands of U.S. dollars)
(Unaudited)
 
   
For the three
months ended
June 30, 2011
   
For the three
months ended
June 30, 2010
   
For the six
months ended
June 30, 2011
   
For the six
months ended
June 30, 2010
 
Comprehensive (loss) income:
                       
Net (loss) income
  $ (24,372 )   $ 18,637     $ (5,027 )   $ 32,206  
Other comprehensive income
                               
Unrealized holdings net gains arising during the period
    18,216       4,399       21,762       28,923  
Adjustment for reclassification of net realized (gains) losses recognized in net (loss) income
    (93 )     (3,869 )     (140 )     (4,181 )
Foreign currency translation adjustment
    528             1,915        
Other comprehensive income
    18,651       530       23,537       24,742  
Comprehensive (loss) income
    (5,721 )     19,167       18,510       56,948  
Net loss attributable to noncontrolling interest
    6             3        
Other comprehensive income attributable to noncontrolling interest
    (7 )           (23 )      
Comprehensive income attributable to noncontrolling interest
    (1 )           (20 )      
Comprehensive (loss) income attributable to Maiden
  $ (5,722 )   $ 19,167     $ 18,490     $ 56,948  

See accompanying notes to the unaudited condensed consolidated financial statements.

 
5

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 (in thousands of U.S. dollars)
(Unaudited)

         
Maiden Shareholders’ Equity
       
For the six months ended
June 30, 2011
 
Total
equity
   
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
    91                                       91        
Net loss
    (5,027 )     (5,024 )                                     (3 )
Change in net unrealized gains on investments
    21,622                       21,622                        
Foreign currency translation adjustment
    1,915                       1,892                       23  
Share based compensation
    678                                       678        
Dividends on common shares
    (10,097 )     (10,097 )                                      
Ending balance
  $ 759,631     $ 106,654     $ (3,801 )   $ 77,848     $ 731     $ 577,904     $ 295  

         
Maiden Shareholders’ Equity
       
For the six months ended
June 30, 2010
 
Total
equity
   
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
    3                                       3        
Net income
    32,206       32,206                                        
Change in net unrealized gains on investments
    24,742                       24,742                        
Share based compensation
    450                                       450        
Dividends on common shares
    (9,138 )     (9,138 )                                      
Ending balance
  $ 724,789     $ 93,849     $ (3,801 )   $ 57,489     $ 713     $ 576,539     $  

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 six months ended June 30,
 
2011
   
2010
 
Cash flows from operating activities:
           
Net (loss) income
  $ (5,027 )   $ 32,206  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of intangibles
    5,213       3,530  
Net realized and unrealized (gains) losses on investments
    (638 )     (847 )
Foreign exchange (gains)  losses
    (2,001 )     1,567  
Amortization of share-based compensation expense, bond premium and discount and junior subordinated debt discount, net
    19,503       (3,599 )
Changes in assets - (increase) decrease:
               
Reinsurance balances receivable, net
    (152,318 )     (77,450 )
Funds withheld
    16,111        
Prepaid reinsurance premiums
    (8,563 )     (3,010 )
Accrued investment income
    1,797       (2,238 )
Deferred commission and other acquisition costs
    (41,037 )     (23,929 )
Other assets
    (3,597 )     (42,745 )
Changes in liabilities – increase (decrease):
               
Reserve for loss and loss adjustment expenses
    36,313       70,776  
Unearned premiums
    181,181       81,207  
Accrued expenses and other liabilities
    (3,283 )     36,978  
Net cash provided by operating activities
    43,654       72,446  
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities – available-for-sale
    (257,268 )     (406,277 )
Purchases of fixed-maturity securities – trading
    (152,844 )     (509,394 )
Purchases of other investments
    (834 )     (123 )
Sale of investments:
               
Proceeds from sales of fixed-maturity securities – available-for-sale
    76,569       173,687  
Proceeds from sales of fixed-maturity securities – trading and short sales
    103,482       558,388  
Proceeds from maturities and calls of fixed-maturity securities – available-for-sale
    243,891       241,703  
Proceeds from redemption of other investments
    4,242       6  
Decrease (increase) in restricted cash and cash equivalents
    22,549       (23,452 )
Purchase of capital assets
    (830 )     (918 )
Net cash provided by investing activities
    38,957       33,620  
Cash flows from financing activities:
               
Repurchase agreements, net
    (76,225 )     (24,429 )
Senior notes issuance
    107,500        
Senior notes issuance cost
    (2,811 )      
Common share issuance
    91       3  
Dividends paid
    (10,095 )     (9,138 )
Net cash provided by (used in) financing activities
    18,460       (33,564 )
Effect of exchange rate changes on foreign currency cash
    1,134       (835 )
Net increase in cash and cash equivalents
    102,205       71,667  
Cash and cash equivalents, beginning of period
    96,151       107,396  
Cash and cash equivalents, end of period
  $ 198,356     $ 179,063  
 
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  
 
Presentation of Comprehensive Income
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all non-owner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance is to be applied retrospectively and is effective for the quarter ending March 31, 2012.  Early adoption is permitted. The adoption of this guidance resulted in a change in the presentation of the Company’s financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.

Intangibles — Goodwill and Other
 
In December 2010, the 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)

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.
 
Accounting Standards Not Yet Adopted
 
Transfers and Servicing:  Reconsideration of Effective Control for Repurchase Agreement

In April 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.

Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS

In May 2011, the FASB issued updated guidance that addresses the objective of the FASB and the International Accounting Standards Board (“IASB”) to develop common requirements for measuring and for disclosing information about fair value measurements with U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The FASB and the IASB worked together to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The FASB and the IASB concluded that this guidance will improve comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The guidance explains how to measure fair value. This updated guidance does not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.  The updated guidance is effective during interim and annual periods after December 15, 2011. Early application is not permitted. The adoption of this guidance is not expected to have any effect on the Company’s results of operations, financial position or liquidity.
 
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 and other investments as of June 30, 2011 and December 31, 2010 are as follows:

As of June 30, 2011
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Fixed Maturities – available-for-sale:
                       
U.S. treasury bonds
  $ 44,241     $ 1,357     $     $ 45,598  
U.S. agency bonds – mortgage backed
    994,852       30,311       (2,019 )     1,023,144  
U.S. agency bonds – other
    16,755       1,468             18,223  
Non-U.S. government bonds
    14,687       1,500             16,187  
Corporate bonds
    661,847       52,446       (9,013 )     705,280  
Municipal bonds
    42,233       646       (532 )     42,347  
Total available-for-sale fixed maturities
  $ 1,774,615     $ 87,728     $ (11,564 )   $ 1,850,779  
                                 
Other investments
  $ 1,783     $ 179     $     $ 1,962  
 
As of December 31, 2010
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Fixed Maturities – available-for-sale:
                       
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  

The contractual maturities of our fixed maturities, available-for-sale as of June 30, 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 June 30, 2011
 
Amortized
Cost
   
Fair
Value
   
% of Total
Fair Value
 
Maturity
                 
Due in one year or less
  $ 65,769     $ 66,404       3.6 %
Due after one year through five years
    221,973       228,070       12.3 %
Due after five years through ten years
    420,133       455,941       24.6 %
Due after ten years
    71,888       77,220       4.2 %
      779,763       827,635       44.7 %
U.S. agency bonds – mortgage backed
    994,852       1,023,144       55.3 %
Total
  $ 1,774,615     $ 1,850,779       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 June 30, 2011
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
                                   
U.S. agency bonds – mortgage backed
  $ 218,857     $ (2,019 )   $     $     $ 218,857     $ (2,019 )
Corporate bonds
    55,065       (1,035 )     129,523       (7,978 )     184,588       (9,013 )
Municipal bonds
    15,916       (532 )                 15,916       (532 )
Total temporarily impaired available-for-sale securities
  $ 289,838     $ (3,586 )   $ 129,523     $ (7,978 )   $ 419,361     $ (11,564 )
 
As of June 30, 2011, there were approximately 21 securities in an unrealized loss position with a fair value of $419,361 and unrealized losses of $11,564. Of these securities, there are 7 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $129,523 and unrealized losses of $7,978.

   
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 June 30, 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 and six months ended June 30, 2011 and 2010, the Company recognized no OTTI. 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 June 30, 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 June 30, 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:
   
June 30, 2011
   
December 31, 2010
 
Hedge fund
  $           $ 4,846       82.9 %
Investments in limited partnerships
    1,962       100.0 %     1,001       17.1 %
Total other investments
  $ 1,962       100.0 %   $ 5,847       100.0 %
 
The Company has an unfunded commitment on its investments in limited partnerships of approximately $4,038 as of June 30, 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 and six months ended June 30, 2011 and 2010:
 
For the three months ended June 30, 2011
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 211     $ (24 )   $ 187  
Trading securities
    810             810  
Other investments
          (94 )     (94 )
Net realized gains
    1,021       (118 )     903  
Unrealized loss on trading securities
          (312 )     (312 )
Net realized and unrealized gains
  $ 1,021     $ (430 )   $ 591  

For the three months ended June 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 5,488     $ (1,619 )   $ 3,869  
Trading securities
    522       (1,137 )     (615 )
Other investments
                 
Net realized gains
    6,010       (2,756 )     3,254  
Unrealized loss on short sales
          (2,719 )     (2,719 )
Net realized and unrealized gains
  $ 6,010     $ (5,475 )   $ 535  

For the six months ended June 30, 2011
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 274     $ (40 )   $ 234  
Trading securities
    810             810  
Other investments
          (94 )     (94 )
Net realized gains
    1,084       (134 )     950  
Unrealized loss on trading securities
          (312 )     (312 )
Net realized and unrealized gains
  $ 1,084     $ (446 )   $ 638  

For the six months ended June 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 5,800     $ (1,619 )   $ 4,181  
Trading securities
    522       (1,137 )     (615 )
Other investments
                 
Net realized gains
    6,322       (2,756 )     3,566  
Unrealized loss on short sales
          (2,719 )     (2,719 )
Net realized and unrealized gains
  $ 6,322     $ (5,475 )   $ 847  
 
 
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)

Proceeds from sales of fixed maturities classified as available-for-sale were $76,569 and $173,687 for the six months ended June 30, 2011 and 2010, respectively.
 
Net unrealized gain (loss) on available-for-sale securities and other investments was as follows:
 
   
June 30, 2011
   
June 30, 2010
 
Fixed maturities
  $ 76,164     $ 57,613  
Other investments
    179       (124 )
Total net unrealized gains
    76,343       57,489  
Deferred income tax expense
    33        
Net unrealized gains, net of deferred income tax
  $ 76,376     $ 57,489  
Change in unrealized gain
  $ 21,622     $ 24,742  

(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:

   
June 30, 2011
   
December 31, 2010
 
Restricted cash – third party agreements
  $ 45,263     $ 59,615  
Restricted cash – related party agreements
    21,448       29,743  
Restricted cash – U.S. state regulatory authorities
    496       398  
Total restricted cash
    67,207       89,756  
Restricted investments – in trust for third party agreements at fair value
(Amortized cost: 2011 – $872,700; 2010 – $1,024,895)
    899,015       1,053,982  
Restricted investments – in trust for related party agreements at fair value
(Amortized cost: 2011 – $413,631; 2010 – $339,810)
    441,750       361,424  
Restricted investments – in trust for U.S. state regulatory authorities
(Amortized cost: 2011 – $13,192; 2010 – $13,198)
    13,824       13,690  
Total restricted investments
    1,354,589       1,429,096  
Total restricted cash and investments
  $ 1,421,796     $ 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 $0 and $756 for the three and six months ended June 30, 2011, respectively, (2010 - $298 and $355, respectively) out of which $0 was accrued as of June 30, 2011 (December 31, 2010 - $702).

 
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
 
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 June 30, 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.

 
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)
 
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 investments 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.

Senior Notes:   The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.

(a) Fair Value Hierarchy
 
The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of June 30, 2011 and December 31, 2010:
 
As of June 30, 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
  $ 95,458     $     $     $ 95,458  
U.S. agency bonds – mortgage backed
          1,023,144             1,023,144  
U.S. agency bonds – other
          18,223             18,223  
Non U.S. government bonds
          16,187             16,187  
Corporate bonds
          705,280             705,280  
Municipal bonds
          42,347             42,347  
Other investments
                1,962       1,962  
Total investments
  $ 95,458     $ 1,805,181     $ 1,962     $ 1,902,601  
As a percentage of total assets
    2.9 %     54.8 %     0.1 %     57.8 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $     $     $  
As a percentage of total liabilities
                       

 
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)

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 investments
  $ 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 %
 
(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 six months ended June 30, 2011 and 2010:
 
Other Investments:
 
For the three
months ended
June 30, 2011
   
For the three
months ended
June 30, 2010
 
Balance at beginning of period
  $ 6,322     $ 5,601  
Net realized and unrealized gains – included in net income
           
Net realized and unrealized losses – included in net income
    (94 )      
Change in net unrealized gains – included in other comprehensive (loss) income
    (151 )      
Change in net unrealized losses – included in other comprehensive (loss) income
          (44 )
Purchases
    593       123  
Sales and redemptions
    (4,708 )     (3 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 1,962     $ 5,677  
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)

4. Fair Value of Financial Instruments (continued)

Other Investments:
 
For the six 
months ended
June 30, 2011
   
For the six 
months ended
June 30, 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
    (94 )      
Change in net unrealized gains – included in other comprehensive income (loss)
    83        
Change in net unrealized losses – included in other comprehensive income (loss)
          11  
Purchases
    834       123  
Sales and redemptions
    (4,708 )     (6 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 1,962     $ 5,677  
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 June 30, 2011 and December 31, 2010:
 
As of June 30, 2011
 
Gross
   
Accumulated
Amortization
   
Net
 
Useful Life
Goodwill
  $ 58,325     $     $ 58,325  
Indefinite
State licenses
    7,727             7,727  
Indefinite
Customer relationships
    51,400       (16,168 )     35,232  
15 years double declining
Net balance
  $ 117, 452     $ (16,168 )   $ 101,284    

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    
 
17

 

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)

The goodwill and intangible assets were recognized as a result of the GMAC International Insurance Services, Ltd. Reinsurance Acquisition and GMAC Insurance 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 six months ended June 30, 2011 and 2010. The estimated amortization expense for the next five years is:

   
June 30, 2011
 
2011
  $ 2,516  
2012
    4,362  
2013
    3,781  
2014
    3,276  
2015
    2,840  
 
6. Long-Term Debt
 
Senior Notes

In June 2011, the Company, through its wholly-owned subsidiary Maiden NA, issued $107,500 principal amount of 8.25% Senior Notes (“Senior Notes”) due on June 15, 2041, which are fully and unconditionally guaranteed by the Company.  The Senior Notes are redeemable for cash, in whole or in part, on or after June 15, 2016, at 100% of the principal amount plus accrued and unpaid interest to but excluding the redemption date.  In order to ensure that issuance of the Senior Notes resulted in a long term favorable impact to Maiden shareholders, the Company sought to repurchase a portion of the Trust Preferred Securities, described below, with the proceeds of the Senior Notes offering. Under the redemption notice provisions of the Trust Preferred Securities, the Company was required to give at least 30 days’ notice in advance of the next interest payment (July 15, 2011) prior to redemption, or incur an additional quarter's interest payments.   Since the Senior Notes offering was initiated after the 30 day notice period on June 16, 2011, the Company offered to all holders an option to have a portion of their Trust Preferred Securities repurchased on a pro rata basis from the proceeds of the Senior Notes offering in exchange for a waiver of such notice provisions and an agreement to accept interest through July 15, 2011.  Certain of the Trust Preferred Securities holders accepted the offer by June 16, 2011.  All proceeds of the Senior Notes offering were used to repurchase the Trust Preferred Securities of the holders who accepted the offer.  The Senior Notes are an unsecured and unsubordinated obligation of the Company and rank ahead of the Junior Subordinated Debt. The effective interest rate of the Senior Notes, based on the net proceeds received, was 8.47%. The net proceeds from the sale of the Senior Notes were $104,689, after placement agent fees and expense or debt issuance cost of $2,811, and were used to repurchase $107,500 principal amount portion of the outstanding Junior Subordinated Debt, as discussed above. The issuance costs related to the Senior Notes were capitalized and will be amortized over the life of the notes.

The interest on the Senior Notes is payable each quarter beginning on September 15, 2011 and will include accrued interest from June 24, 2011. Interest expense for the period ended June 30, 2011 was $173.

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.

 
18

 

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

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 (adjusted for the $107,500 repurchase of Junior Subordinated Debt, see Note 12), the additional amount due would be $21,350, 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%.

As of June 30, 2011, the stated value of the Junior Subordinated Debt was $215,228 which comprises the principal amount of $260,000 and unamortized discount of $44,772. Amortization expense for the three and six months ended June 30, 2011 was $19 and $37, respectively (2010 - $16 and $31, respectively).  Interest expense for the three and six months ended June 30, 2011 was $9,100 and $18,200, respectively (2010 - $9,100 and $18,200, respectively).

As a result of the Senior Notes Offering, the Company announced that it will repurchase $107,500 of the Junior Subordinated Debt on July 15, 2011.  Pursuant to the terms of the TRUPS Offering, the Company incurred a repurchase expense equivalent to one year’s interest expense or $15,050.  The Company also accelerated the amortization of the issuance cost and discount related to those repurchased Junior Subordinated Debt which amounted to $20,313.
 
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
June 30,  2011
   
For the
three months
ended 
June 30, 2010
   
For the
six months
ended 
June 30, 2011
   
For the
six months
ended 
June 30, 2010
 
Net (loss) income available to Maiden common shareholders
  $ (24,366 )   $ 18,637     $ (5,024 )   $ 32,206  
                                 
Weighted average number of common shares outstanding – basic
    72,118,315       70,291,894       72,112,785       70,291,650  
Potentially dilutive securities:
                               
Warrants
                       
Share options
    827,024       478,955       750,709       482,114  
Weighted average number of common shares outstanding – diluted
    72,945,339       70,770,849       72,863,494       70,773,764  
                                 
Basic (loss) earnings per share attributable to Maiden shareholders:
  $ (0.34 )   $ 0.27     $ (0.07 )   $ 0.46  
Diluted (loss) earnings per share attributable to Maiden shareholders:
  $ (0.34 )   $ 0.26     $ (0.07 )   $ 0.46  
 
 
19

 

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

 
7. Earnings per Common Share (continued)

As of June 30, 2011, no warrants (June 30, 2010 – 4,050,000) and 2,161,409 share options (June 30, 2010 – 1,689,874) 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 $678 for the three and six months ended June 30, 2011, respectively (2010 - $240 and $450, respectively). 
 
The key assumptions used in determining the fair value of options granted in the three and six months ended June 30, 2011 and a summary of the methodology applied to develop each assumption are as follows: 
 
Assumptions:
 
June 30, 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 %
 
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 the Company 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.

 
20

 

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)

The following tables show all options granted, exercised, expired and exchanged under the Plan for the three and six months ended June 30, 2011 and 2010:
 
For the three months ended June 30, 2011
 
Number of
Share Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, March 31, 2011
    2,906,065     $ 6.41    
8.13 years
 
Granted
    29,000       9.09    
9.90 years
 
Exercised
    (42,532 )     3.80        
Cancelled
                 
Outstanding, June 30, 2011
    2,892,533     $ 6.47    
7.96 years
 

For the three months ended June 30, 2010
 
Number of
Share Options
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, March 31, 2010
    2,335,824     $ 5.98    
8.78 years
 
Granted
                 
Exercised
    (344 )     3.28        
Cancelled
    (4,250 )     3.28        
Outstanding, June 30, 2010
    2,331,230     $ 5.99    
8.53 years
 

For the six months ended June 30, 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
    36,500       8.81    
9.86 years
 
Exercised
    (43,530 )     3.79        
Cancelled
    (41,313 )     7.21        
Outstanding, June 30, 2011
    2,892,533     $ 6.47    
7.96 years
 

For the six months ended June 30, 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    
9.68 years
 
Exercised
    (812 )     3.28        
Cancelled
    (4,500 )     3.28        
Outstanding, June 30, 2010
    2,331,230     $ 5.99    
8.53 years
 

The weighted average grant date fair value was $1.95 and $1.76 for all options outstanding at June 30, 2011 and 2010, respectively. There was approximately $2,748 and $2,400 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of June 30, 2011 and 2010, respectively.
 
9. Dividends Declared

On May 4, 2011, the Company’s Board of Directors authorized a quarterly dividend of $0.07 per common share, payable on July 15, 2011 to shareholders of record on July 1, 2011.

 
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
 
The Founding Shareholders of the Company, 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”).

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 Maiden Insurance Company Ltd. (“Maiden Bermuda”), a wholly-owned subsidiary of the Company, and AmTrust’s Bermuda reinsurance subsidiary, AmTrust International Insurance, Ltd. (“AII”), 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, Maiden Bermuda and AII 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 Reinsurance Agreement shall not be applicable to Retail Commercial Package Business.

On February 9, 2009, Maiden Bermuda and AII 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.

Effective April 1, 2011, Maiden Bermuda and AII amended the Reinsurance Agreement to reduce the commission on all business ceded except Retail Commercial Package Business to 30% until December, 31, 2011. Thereafter the rate shall be 31% subject to an adjustment of 1% to 30% if the proportion of Specialty Risk and Extended Warranty premium ceded is greater than or equal to 42% of the Covered Business (excluding Retail Commercial Package Business). If the proportion of Specialty Risk and Extended Warranty premium ceded is greater than or equal to 38% but less than 42% of the Covered Business (excluding Retail Commercial Package Business), the commission rate shall be reduced by 0.5% to 30.5%. In addition, the collateral requirements were restated to clarify that balances relating to all AmTrust subsidiaries are subject to collateral requirements and the Reinsurance Agreement was extended by one year to July 14, 2014, and shall automatically renew for successive three-year periods thereafter, unless the Reinsurer or Company elects to terminate this Agreement effective as of July 1, 2014 or as of the expiration of any successive three-year period. If the Reinsurer or Company elects to so terminate this Agreement, it shall give written notice to the other party hereto not less than nine months prior to either July 1, 2014 or the expiration of any successive three-year period.

 
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)

The Company recorded approximately $35,437 and $71,243 of ceding commission expense for the three and six months ended June 30, 2011, respectively, (2010 - $31,819 and $66,584, respectively) as a result of this transaction.

AmTrust European Hospital Liability Quota Share Agreement (“European Hospital Liability Quota Share”)

Effective April 1, 2011, the Company, through Maiden Bermuda, entered into a quota share reinsurance contract with AmTrust Europe Limited and AmTrust International Underwriters Limited, both wholly-owned subsidiaries of AmTrust.  Pursuant to the terms of the contract, Maiden Bermuda will assume 40% of the premiums and losses related to policies classified as European Hospital Liability, including associated liability coverages and policies covering physician defense costs, written or renewed on or after April 1, 2011.  The contract also covers policies written or renewed on or before March 31, 2011, but only with respect to losses that occur, accrue or arise on or after April 1, 2011.  The maximum limit of liability attaching shall be €5,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Maiden Bermuda will pay a ceding commission of 5% and shall allow the reinsured a profit share on original net premiums ceded under the contract.  The profit sharing is based upon the reinsured exceeding defined underwriting performance of each contract year, commencing two years after the beginning of each contract year.  To the extent that the underwriting performance is exceeded, the Company will share 50% of the excess amounts computed.  For the three months period ended June 30, 2011, the Company recorded approximately $975 of commission expense 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.  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 that AmTrust has purchased.