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 September 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 November 2, 2011, the Registrant had one class of Common Stock ($.01 par value), of which 72,206,276 shares were outstanding.
 
 
 

 

INDEX

   
Page
PART I - Financial Information
   
Item 1.
Financial Statements
   
       
 
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
 
3
       
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010 (unaudited)
 
4
       
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010 (unaudited)
 
5
       
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2011 and 2010 (unaudited)
 
6
       
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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
 
33
       
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 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)

   
September 30,
2011
(Unaudited)
   
December 31,
2010
(Audited)
 
ASSETS
           
Investments:
           
Fixed maturities, available-for-sale, at fair value (Amortized cost 2011:$1,821,751; 2010: $1,819,775)
  $ 1,898,070     $ 1,874,433  
Other investments, at fair value (Cost 2011: $1,812; 2010: $5,751)
    2,010       5,847  
Total investments
    1,900,080       1,880,280  
Cash and cash equivalents
    146,308       96,151  
Restricted cash and cash equivalents
    96,770       89,756  
Accrued investment income
    11,344       14,091  
Reinsurance balances receivable, net (includes $181,457 and $95,227 from related parties in 2011 and 2010, respectively)
    372,521       226,333  
Funds withheld
    143,952       152,713  
Prepaid reinsurance premiums (includes $7,519 and $1,211 from related parties in 2011 and 2010, respectively)
    39,339       28,992  
Reinsurance recoverable on unpaid losses (includes $3,673 and $383 from related parties in 2011 and 2010, respectively)
    12,573       6,656  
Loan to related party
    167,975       167,975  
Deferred commission and other acquisition costs (includes $142,146 and $118,015 from related parties in 2011 and 2010, respectively)
    248,144       203,631  
Goodwill and intangible assets, net
    100,026       103,905  
Other assets
    17,035       12,079  
Total assets
  $ 3,256,067     $ 2,982,562  
LIABILITIES
               
Reserve for loss and loss adjustment expenses (includes $355,578 and $263,916  from related parties in 2011 and 2010, respectively)
  $ 1,325,836     $ 1,226,773  
Unearned premiums (includes $480,444 and $366,412 from related parties in 2011 and 2010, respectively)
    845,424       657,556  
Accrued expenses and other liabilities
    83,507       56,368  
Securities sold under agreements to repurchase, at contract value
          76,225  
Senior notes
    107,500        
Junior subordinated debt
    126,251       215,191  
Total liabilities
    2,488,518       2,232,113  
Commitments and Contingencies
               
EQUITY
               
Common shares ($0.01 par value;73,168,608 and 73,069,436 shares issued in 2011 and 2010, respectively; 72,206,272 and 72,107,100 shares outstanding in 2011 and 2010, respectively)
    732       731  
Additional paid-in capital
    578,634       577,135  
Accumulated other comprehensive income
    74,762       54,334  
Retained earnings
    116,882       121,775  
Treasury shares, at cost (2011 and 2010: 962,336 shares)
    (3,801 )     (3,801 )
Total Maiden shareholders’ equity
    767,209       750,174  
Noncontrolling interest in subsidiaries
    340       275  
Total equity
    767,549       750,449  
Total liabilities and equity
  $ 3,256,067     $ 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
September 30,
2011
   
For the three
months ended
September 30,
2010
   
For the nine
months ended
September 30,
2011
   
For the nine
months ended
September 30,
2010
 
Revenues:
                       
Gross premiums written
  $ 451,130     $ 289,815     $ 1,384,302     $ 951,981  
Net premiums written
  $ 428,586     $ 273,435     $ 1,315,052     $ 897,776  
Change in unearned premiums
    (8,309 )     36,158       (180,457 )     (40,470 )
Net premiums earned
    420,277       309,593       1,134,595       857,306  
Other insurance revenue
    4,530             11,364        
Net investment income
    18,749       17,500       57,708       53,956  
Net realized and unrealized investment (losses) gains
    (2,900 )     1,627       (2,262 )     2,474  
Total revenues
    440,656       328,720       1,201,405       913,736  
Expenses:
                               
Net loss and loss adjustment expenses
    274,504       200,625       746,285       546,264  
Commission and other acquisition expenses
    126,777       88,956       339,673       254,799  
General and administrative expenses
    12,475       10,840       37,607       28,876  
Interest and amortization expenses
    8,178       9,117       26,588       27,348  
Accelerated amortization of junior subordinated debt discount and issuance cost
                20,313        
Junior subordinated debt repurchase expense
                15,050        
Amortization of intangible assets
    1,258       1,452       3,775       4,356  
Foreign exchange losses (gains)
    1,103       (1,187 )     (898 )     380  
Total expenses
    424,295       309,803       1,188,393       862,023  
Income before income taxes
    16,361       18,917       13,012       51,713  
Income taxes:
                               
Current tax expense
    203       100       1,299       100  
Deferred tax expense
    156       291       738       881  
Income tax expense
    359       391       2,037       981  
Net income
    16,002       18,526       10,975       50,732  
Add: Loss attributable to noncontrolling interest
    2             5        
Net income attributable to Maiden shareholders
  $ 16,004     $ 18,526     $ 10,980     $ 50,732  
                                 
Basic earnings per share attributable to Maiden shareholders
  $ 0.22     $ 0.26     $ 0.15     $ 0.72  
Diluted earnings per share attributable to Maiden shareholders
  $ 0.22     $ 0.26     $ 0.15     $ 0.72  
Dividends declared per common share
  $ 0.08     $ 0.065     $ 0.22     $ 0.195  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
4

 

MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. dollars)
(Unaudited)

   
For the three
months ended
September 30,
2011
   
For the three
months ended
September 30,
2010
   
For the nine
months ended
September 30,
2011
   
For the nine
months ended
September 30,
2010
 
Comprehensive income:
                       
Net income
  $ 16,002     $ 18,526     $ 10,975     $ 50,732  
Other comprehensive income
                               
Unrealized holdings net gains arising during the period
    33       22,675       21,795       51,598  
Adjustment for reclassification of net realized losses (gains) recognized in net income
    65       (3,226 )     (75 )     (7,407 )
Foreign currency translation adjustment
    (3,206 )           (1,291 )      
Other comprehensive (loss) income
    (3,108 )     19,449       20,429       44,191  
Comprehensive income
    12,894       37,975       31,404       94,923  
Net loss attributable to noncontrolling interest
    2             5        
Other comprehensive loss (income) attributable to noncontrolling interest
    22             (1 )      
Comprehensive loss attributable to noncontrolling interest
    24             4        
Comprehensive income attributable to Maiden shareholders
  $ 12,918     $ 37,975     $ 31,408     $ 94,923  

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 nine months ended
September 30, 2011
 
Total
equity
   
Retained
earnings
   
Treasury
shares
   
Accumulated
other
comprehensive
income
   
Common
shares
   
Additional
paid-in
capital
   
Noncontrolling
interest in
subsidiaries
 
Beginning balance
  $ 750,449     $ 121,775     $ (3,801 )   $ 54,334     $ 731     $ 577,135     $ 275  
Exercise of options and issuance of shares
    348                               1       347        
Partial disposal of interest in subsidiary
    210                                       141       69  
Net income (loss)
    10,975       10,980                                       (5 )
Change in net unrealized gains on investments
    21,720                       21,720                        
Foreign currency translation adjustment
    (1,291 )                     (1,292 )                     1  
Share based compensation
    1,011                                       1,011        
Dividends on common shares
    (15,873 )     (15,873 )                                      
Ending balance
  $ 767,549     $ 116,882     $ (3,801 )   $ 74,762     $ 732     $ 578,634     $ 340  

          
Maiden Shareholders’ Equity
       
For the nine months ended
September 30, 2010
 
Total
equity
   
Retained
earnings
   
Treasury
shares
   
Accumulated
other
comprehensive
income
   
Common
shares
   
Additional
paid-in
capital
   
Noncontrolling
interest in
subsidiaries
 
Beginning balance
  $ 676,526     $ 70,781     $ (3,801 )   $ 32,747     $ 713     $ 576,086     $  
Exercise of options and issuance of shares
    61                               18       43        
Exchange of warrants for common shares
    (18 )                                     (18 )      
Net income
    50,732       50,732                                        
Change in net unrealized gains on investments
    44,191                       44,191                        
Share based compensation
    702                                       702        
Dividends on common shares
    (13,825 )     (13,825 )                                      
Ending balance
  $ 758,369     $ 107,688     $ (3,801 )   $ 76,938     $ 731     $ 576,813     $  

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 nine months ended September 30,
 
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 10,975     $ 50,732  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of intangibles
    6,828       5,370  
Net realized and unrealized losses (gains) on investments
    2,262       (2,474 )
Foreign exchange (gains) losses
    (898 )     380  
Amortization of share-based compensation expense, bond premium and discount and junior subordinated debt discount, net
    20,248       (4,313 )
Changes in assets - (increase) decrease:
               
Reinsurance balances receivable, net
    (151,263 )     (46,938 )
Funds withheld
    16,402        
Prepaid reinsurance premiums
    (10,347 )     (2,823 )
Reinsurance recoverable on unpaid losses
    (5,917 )     5,984  
Accrued investment income
    2,749       70  
Deferred commission and other acquisition costs
    (44,635 )     (14,258 )
Other assets
    (9,650 )     (3,570 )
Changes in liabilities – increase (decrease):
               
Reserve for loss and loss adjustment expenses
    100,223       87,541  
Unearned premiums
    191,135       44,754  
Accrued expenses and other liabilities
    (23,002 )     (6,238 )
Net cash provided by operating activities
    105,110       114,217  
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities – available-for-sale
    (359,140 )     (408,765 )
Purchases of fixed-maturity securities – trading and short sales
    (825,703 )     (918,476 )
Purchases of other investments
    (1,026 )     (136 )
Sale of investments:
               
Proceeds from sales of fixed-maturity securities – available-for-sale
    106,041       113,136  
Proceeds from sales of fixed-maturity securities – trading and short sales
    826,509       967,548  
Proceeds from maturities and calls of fixed-maturity securities – available-for-sale
    297,321       409,061  
Proceeds from redemption of other investments
    4,382       38  
Increase in restricted cash and cash equivalents
    (7,014 )     (73,923 )
Purchase of capital assets
    (1,093 )     (916 )
Net cash provided by investing activities
    40,277       87,567  
Cash flows from financing activities:
               
Repurchase agreements, net
    (76,225 )     (25,727 )
Senior notes issuance
    107,500        
Senior notes issuance cost
    (2,811 )      
Repayment of junior subordinated debt
    (107,500 )      
Common share issuance
    348       43  
Dividends paid
    (15,144 )     (13,707 )
Net cash used in financing activities
    (93,832 )     (39,391 )
Effect of exchange rate changes on foreign currency cash
    (1,398 )     (303 )
Net increase in cash and cash equivalents
    50,157       162,090  
Cash and cash equivalents, beginning of period
    96,151       107,396  
Cash and cash equivalents, end of period
  $ 146,308     $ 269,486  

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” or “Maiden”) 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: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts

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.

Intangibles — Goodwill and Other: Testing Goodwill for Impairment

In September 2011, the FASB issued updated guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The FASB provided a sample list of events and circumstances that an entity can consider in performing its qualitative assessment. Under the amended guidance, an entity has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test and may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is 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 September 30, 2011 and December 31, 2010 are as follows:

As of September 30, 2011
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Fixed Maturities – available-for-sale:
                       
U.S. treasury bonds
  $ 44,208     $ 1,834     $     $ 46,042  
U.S. agency bonds – mortgage-backed
    976,019       45,938       (5 )     1,021,952  
U.S. agency bonds – other
    16,738       1,856             18,594  
Non-U.S. government bonds
    14,584       578             15,162  
Corporate bonds
    659,471       49,965       (24,527 )     684,909  
Municipal bonds
    110,731       680             111,411  
Total available-for-sale fixed maturities
  $ 1,821,751     $ 100,851     $ (24,532 )   $ 1,898,070  
                                 
Other investments
  $ 1,812     $ 198     $     $ 2,010  
 
 
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 September 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 September 30, 2011
 
Amortized
Cost
   
Fair
Value
   
% of Total
Fair Value
   
Maturity
                   
Due in one year or less
  $ 67,804     $ 67,418       3.6 %  
Due after one year through five years
    222,474       221,039       11.7 %  
Due after five years through ten years
    423,502       452,131       23.8 %  
Due after ten years
    131,952       135,530       7.1 %  
      845,732       876,118       46.2 %  
U.S. agency bonds – mortgage-backed
    976,019       1,021,952       53.8 %  
Total
  $ 1,821,751     $ 1,898,070       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 in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the securities have continuously been in an unrealized loss position:

    
Less than 12 Months
   
12 Months or More
   
Total
 
As of September 30, 2011
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
                                   
U.S. agency bonds – mortgage-backed
  $ 2,258     $ (5 )   $     $     $ 2,258     $ (5 )
Corporate bonds
    127,659       (5,088 )     118,138       (19,439 )     245,797       (24,527 )
Total temporarily impaired available-for-sale securities
  $ 129,917     $ (5,093 )   $ 118,138     $ (19,439 )   $ 248,055     $ (24,532 )

As of September 30, 2011, there were approximately 26 securities in an unrealized loss position with a fair value of $248,055 and unrealized losses of $24,532. 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 $118,138 and unrealized losses of $19,439.

    
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 September 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 nine months ended September 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 September 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 September 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:
   
September 30, 2011
   
December 31, 2010
 
Hedge fund
  $           $ 4,846       82.9 %
Investments in limited partnerships
    2,010       100.0 %     1,001       17.1 %
Total other investments
  $ 2,010       100.0 %   $ 5,847       100.0 %

The Company has an unfunded commitment on its investments in limited partnerships of approximately $3,990 as of September 30, 2011.

(c) Realized and Unrealized Investment 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 Company maintained one open position in a U.S. Treasury bond sold but not yet purchased valued at $55,495 which resulted in an unrealized loss of $3,143, which is recorded in net realized and unrealized investment gains (losses) on the Company’s consolidated statement of income for the three and nine months ended September 30, 2011, respectively. The following provides an analysis of realized and unrealized investment gains and losses for the three and nine months ended September 30, 2011 and 2010:

For the three months ended September 30, 2011
 
Gross gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 1,036     $ (1,078 )   $ (42 )
Trading securities and short sales
    1,898       (1,590 )     308  
Other investments
          (23 )     (23 )
Net realized gains
    2,934       (2,691 )     243  
Unrealized loss on short sales
          (3,143 )     (3,143 )
Net realized and unrealized investment gains (losses)
  $ 2,934     $ (5,834 )   $ (2,900 )

For the three months ended September 30, 2010
 
Gross gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 3,612     $ (137 )   $ 3,475  
Trading securities
    1,127       (781 )     346  
Other investments
          (249 )     (249 )
Net realized gains
    4,739       (1,167 )     3,572  
Unrealized loss on short sales
          (1,945 )     (1,945 )
Net realized and unrealized investment gains (losses)
  $ 4,739     $ (3,112 )   $ 1,627  

For the nine months ended September 30, 2011
 
Gross gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 1,310     $ (1,118 )   $ 192  
Trading securities and short sales
    2,708       (1,902 )     806  
Other investments
          (117 )     (117 )
Net realized gains
    4,018       (3,137 )     881  
Unrealized loss on short sales
          (3,143 )     (3,143 )
Net realized and unrealized investment gains (losses)
  $ 4,018     $ (6,280 )   $ (2,262 )
 
 
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)

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

Proceeds from sales of fixed maturities classified as available-for-sale were $106,041 and $113,136 for the nine months ended September 30, 2011 and 2010, respectively.

Net unrealized gain (loss) on available-for-sale securities and other investments was as follows:

   
September 30, 2011
   
September 30, 2010
 
Fixed maturities
  $ 76,319     $ 76,941  
Other investments
    198       (3 )
Total net unrealized gains
    76,517       76,938  
Deferred income tax expense
    (43 )      
Net unrealized gains, net of deferred income tax
  $ 76,474     $ 76,938  
Change in unrealized gains, net of deferred income tax
  $ 21,720     $ 44,191  

(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:

   
September 30, 2011
   
December 31, 2010
 
Restricted cash – third party agreements
  $ 53,268     $ 59,615  
Restricted cash – related party agreements
    43,038       29,743  
Restricted cash – U.S. state regulatory authorities
    464       398  
Total restricted cash
    96,770       89,756  
Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2011 – $866,400; 2010 – $1,024,895 )
    890,616       1,053,982  
Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2011 – $424,180; 2010 – $339,810 )
    453,258       361,424  
Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2011 – $12,865; 2010 – $13,198 )
    13,763       13,690  
Total restricted investments
    1,357,637       1,429,096  
Total restricted cash and investments
  $ 1,454,407     $ 1,518,852  
 
 
13

 

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)

(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 nine months ended September 30, 2011, respectively, (2010 - $463 and $818, respectively) out of which $0 was accrued as of September 30, 2011 (December 31, 2010 - $702).

Securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices.  The Company’s liability for securities to be delivered is measured at their fair value and as of September 30, 2011 were $55,495 for a U.S. Treasury bond.  This amount is included in accrued expenses and other liabilities in the condensed consolidated balance sheets.  Collateral of an equivalent amount has been pledged to the clearing broker.

4. Fair Value of Financial Instruments

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:

 
·
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

 
·
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

 
·
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 825, “Disclosure about Fair Value of Financial Instruments,” requires all entities to disclose the fair value of their financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value.

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of September 30, 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.
 
 
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)

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 and auction rate securities issued by U.S. domiciled state and municipality entities. The fair value of these securities is 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 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.

Senior Notes: 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.
 
 
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)

(a) Fair Value Hierarchy

The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of September 30, 2011 and December 31, 2010:

As of September 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
  $ 46,042     $     $     $ 46,042  
U.S. agency bonds – mortgage-backed
          1,021,952             1,021,952  
U.S. agency bonds – other
          18,594             18,594  
Non U.S. government bonds
          15,162             15,162  
Corporate bonds
          684,909             684,909  
Municipal bonds
          111,411             111,411  
Other investments
                2,010       2,010  
Total investments
  $ 46,042     $ 1,852,028     $ 2,010     $ 1,900,080  
As a percentage of total assets
    1.4 %     56.9 %     0.1 %     58.4 %
Liabilities
                               
Securities sold but not yet purchased
  $     $ 55,495     $     $ 55,495  
As a percentage of total liabilities
          2.2 %           2.2 %

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 %
 
 
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)

(b) Level 3 Financial Instruments

The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis for the three and nine months ended September 30, 2011 and 2010:

Other Investments:
 
For the three
months ended
September 30,
2011
   
For the three
months ended
September 30,
2010
 
Balance at beginning of period
  $ 1,962     $ 5,677  
Net realized and unrealized gains – included in net income
           
Net realized and unrealized losses – included in net income
    (23 )     (249 )
Change in net unrealized gains – included in other comprehensive income
    19        
Change in net unrealized losses – included in other comprehensive income
          122  
Purchases
    192       4,764  
Sales and redemptions
    (140 )     (4,783 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 2,010     $ 5,531  
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  

 
Other Investments:
 
For the nine
months ended
September 30,
2011
   
For the nine
months ended
September 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
    (117 )     (249 )
Change in net unrealized gains – included in other comprehensive income
    102        
Change in net unrealized losses – included in other comprehensive income
          133  
Purchases
    1,026       4,887  
Sales and redemptions
    (4,848 )     (4,789 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 2,010     $ 5,531  
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  
 
 
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

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.

Intangible Assets

Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks. Insurance company licenses are considered indefinite life intangible assets subject to annual impairment testing.

The following table shows an analysis of goodwill and intangible assets as of September 30, 2011 and December 31, 2010:

As of September 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       (17,426 )     33,974  
15 years double declining
Net balance
  $ 117, 452     $ (17,426 )   $ 100,026    

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 acquisitions and are subject to annual impairment testing. No impairment was recorded during the three and nine months ended September 30, 2011 and 2010. The estimated amortization expenses for the next five years are:

   
September 30, 2011
 
2011
  $ 1,258  
2012
    4,362  
2013
    3,781  
2014
    3,276  
2015
    2,840  
 
 
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

Senior Notes

In June 2011, the Company, through its wholly-owned subsidiary Maiden Holdings North America, Ltd. ("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, described below. 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 included accrued interest from June 24, 2011. Interest expense for the three months period ended September 30, 2011 and the period from June 24, 2011 to September 30, 2011 were $2,217 and $2,390, respectively, out of which $394 was accrued as of September 30, 2011.
 
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 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, 11,700,000 common shares were issued 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 “Junior Subordinated Debt”) 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 remaining 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, which occurred on July 15, 2011), the additional amount due would be $21,350, which would be a reduction in earnings.
 
 
19

 

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)

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 Junior Subordinated Debt and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%.

Using the proceeds from the Senior Notes Offering and existing cash, the Company repurchased $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.

As of September 30, 2011, the stated value of the Junior Subordinated Debt was $126,251 which comprises the principal amount of $152,500 and unamortized discount of $26,249. Amortization expense for the three and nine months ended September 30, 2011 was $4 and $33, respectively (2010 - $17 and $48, respectively).  Interest expense for the three and nine months ended September 30, 2011 was $5,965 and $24,165, respectively (2010 - $9,100 and $27,300, respectively), out of which $4,448 was accrued as of September 30, 2011.

 
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
September 30,
2011
   
For the
three months
ended
September 30,
2010
   
For the
nine months
ended
September 30,
2011
   
For the
nine months
ended
September 30,
2010
 
Net income attributable to Maiden shareholders
  $ 16,004     $ 18,526     $ 10,980     $ 50,732  
                                 
Weighted average number of common shares outstanding – basic
    72,182,759       70,493,545       72,136,366       70,359,688  
Potentially dilutive securities:
                               
Share options
    739,209       491,837       746,968       483,774  
Weighted average number of common shares outstanding – diluted
    72,921,968       70,985,382       72,883,334       70,843,462  
                                 
Basic earnings per share attributable to Maiden shareholders:
  $ 0.22     $ 0.26     $ 0.15     $ 0.72  
Diluted earnings per share attributable to Maiden shareholders:
  $ 0.22     $ 0.26     $ 0.15     $ 0.72  
 
 
20

 

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 September 30, 2011, 2,147,674 share options (September 30, 2010 – 1,756,961) 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 expenses (a component of salaries and benefits) in the amount of approximately $333 and $1,011 for the three and nine months ended September 30, 2011, respectively (2010 - $252 and $702, respectively).

The key assumptions used in determining the fair value of options granted in the three and nine months ended September 30, 2011 and a summary of the methodology applied to develop each assumption are as follows:

Assumptions:
 
September 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.
 
 
21

 

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 nine months ended September 30, 2011 and 2010:

For the three months ended September 30, 2011
 
Number of
Share Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, June 30, 2011
    2,892,533     $ 6.47    
7.96 years
 
Granted
                 
Exercised
    (55,642 )     3.28        
Cancelled
    (1,750 )     7.66        
Outstanding, September 30, 2011
    2,835,141     $ 6.54    
7.72 years
 

For the three months ended September 30, 2010
 
Number of
Share Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, June 30, 2010
    2,381,230     $ 6.01    
8.56 years
 
Granted
    22,500       7.68    
10.00 years
 
Exercised
    (13,593 )     3.28        
Cancelled
    (4,251 )     3.28        
Outstanding, September 30, 2010
    2,385,886     $ 6.05    
8.32 years
 

For the nine months ended September 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    
9.61 years
 
Exercised
    (99,172 )     3.50        
Cancelled
    (43,063 )     7.23        
Outstanding, September 30, 2011
    2,835,141     $ 6.54    
7.72 years
 

For the nine months ended September 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
    372,500       7.28    
9.46 years
 
Exercised
    (14,405 )     3.28        
Cancelled
    (8,751 )     3.28        
Outstanding, September 30, 2010
    2,385,886     $ 6.05    
8.32 years
 

The weighted average grant date fair value was $1.97 and $1.79 for all options outstanding at September 30, 2011 and 2010, respectively. There was approximately $2,411 and $2,324 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of September 30, 2011 and 2010, respectively.

9. Dividends Declared

On July 27, 2011, the Company’s Board of Directors authorized a quarterly dividend of $0.08 per common share, payable on October 17, 2011 to shareholders of record on October 3, 2011.
 
 
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

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 subsidiar