Q1 2012 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¬
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) 298-4900
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¬

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 May 2, 2012, the Registrant had one class of Common Stock ($.01 par value), of which 72,256,816 shares were outstanding.






INDEX
 
 
Page
PART I - Financial Information
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
PART II - Other Information
 
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

 
 
 
 




2



PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share and per share data)
 
March 31, 2012 (Unaudited)
 
December 31, 2011 (Audited)
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (Amortized cost 2012: $2,106,626; 2011: $1,957,106)
$
2,199,470

 
$
2,020,661

Other investments, at fair value (Cost 2012: $2,181; 2011: $1,955)
2,430

 
2,192

Total investments
2,201,900

 
2,022,853

Cash and cash equivalents
183,846

 
188,082

Restricted cash and cash equivalents
89,979

 
114,895

Accrued investment income
14,901

 
13,215

Reinsurance balances receivable, net (includes $256,869 and $178,745 from related parties in 2012 and 2011, respectively)
508,633

 
382,670

Funds withheld
44,817

 
42,605

Prepaid reinsurance premiums (includes $5,456 and $7,265 from related parties in 2012 and 2011, respectively)
35,886

 
35,381

Reinsurance recoverable on unpaid losses (includes $7,712 and $7,207 from related parties in 2012 and 2011, respectively)
25,901

 
20,289

Loan to related party
167,975

 
167,975

Deferred commission and other acquisition costs (includes $163,311 and $147,743 from related parties in 2012 and 2011, respectively)
277,547

 
248,436

Goodwill and intangible assets, net
97,665

 
98,755

Other assets
19,368

 
19,270

Total assets
$
3,668,418

 
$
3,354,426

LIABILITIES
 
 
 
Reserve for loss and loss adjustment expenses (includes $444,866 and $396,198 from related parties in 2012 and 2011, respectively)
$
1,460,618

 
$
1,398,438

Unearned premiums (includes $553,613 and $483,935 from related parties in 2012 and 2011, respectively)
994,728

 
832,047

Accrued expenses and other liabilities
68,511

 
121,198

Senior notes
207,500

 
107,500

Junior subordinated debt
126,276

 
126,263

Total liabilities
2,857,633

 
2,585,446

Commitments and Contingencies


 


EQUITY
 
 
 
Common shares ($0.01 par value; 73,219,148 and 73,183,764 shares issued in 2012 and 2011, respectively; 72,256,812 and 72,221,428 shares outstanding in 2012 and 2011, respectively)
732

 
732

Additional paid-in capital
579,413

 
579,004

Accumulated other comprehensive income
90,849

 
64,059

Retained earnings
143,245

 
128,648

Treasury shares, at cost (2012 and 2011: 962,336 shares)
(3,801
)
 
(3,801
)
Total Maiden shareholders’ equity
810,438

 
768,642

Noncontrolling interest in subsidiaries
347

 
338

Total equity
810,785

 
768,980

Total liabilities and equity
$
3,668,418

 
$
3,354,426

See accompanying notes to the unaudited condensed consolidated financial statements.

3


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

 
For the Three Months Ended March 31,
 
2012
 
2011
Revenues:
 
 
 
Gross premiums written
$
613,212

 
$
470,777

Net premiums written
$
590,833

 
$
449,500

Change in unearned premiums
(152,337
)
 
(102,965
)
Net premiums earned
438,496

 
346,535

Other insurance revenue
4,754

 
4,655

Net investment income
18,437

 
19,141

Net realized and unrealized gains on investment
1,365

 
47

Total revenues
463,052

 
370,378

Expenses:
 
 
 
Net loss and loss adjustment expenses
287,917

 
221,182

Commission and other acquisition expenses
132,258

 
107,072

General and administrative expenses
13,831

 
12,293

Interest and amortization expenses
7,678

 
9,118

Amortization of intangible assets
1,090

 
1,258

Foreign exchange gains
(979
)
 
(1,062
)
Total expenses
441,795

 
349,861

Income before income taxes
21,257

 
20,517

Income taxes:
 
 
 
Current tax expense
638

 
885

Deferred tax expense
241

 
287

Income tax expense
879

 
1,172

Net income
20,378

 
19,345

Less: Income attributable to noncontrolling interest
(1
)
 
(3
)
Net income attributable to Maiden shareholders
$
20,377

 
$
19,342

Basic earnings per share attributable to Maiden shareholders
$
0.28

 
$
0.27

Diluted earnings per share attributable to Maiden shareholders
$
0.28

 
$
0.27

Dividends declared per common share
$
0.08

 
$
0.07


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 March 31,
 
2012
 
2011
Comprehensive income:
 
 
 
Net income
$
20,378

 
$
19,345

Other comprehensive income
 
 
 
Unrealized holdings net gains arising during the period
29,309

 
3,546

Adjustment for reclassification of net realized gains recognized in net income
(10
)
 
(47
)
Foreign currency translation adjustment
(2,501
)
 
1,387

Other comprehensive income
26,798

 
4,886

Comprehensive income
47,176

 
24,231

Net income attributable to noncontrolling interest
(1
)
 
(3
)
Other comprehensive income attributable to noncontrolling interest
(8
)
 
(16
)
Comprehensive income attributable to noncontrolling interest
(9
)
 
(19
)
Comprehensive income attributable to Maiden shareholders
$
47,167

 
$
24,212



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 Three Months Ended March 31, 2012
 
Total
equity
 
Retained
earnings
 
Treasury
shares
 
Accumulated
other
comprehensive
income
 
Common
shares
 
Additional
paid-in capital
 
Noncontrolling
interest in
subsidiaries
Beginning balance
 
$
768,980

 
$
128,648

 
$
(3,801
)
 
$
64,059

 
$
732

 
$
579,004

 
$
338

Exercise of options and issuance of shares
 
124

 


 


 


 

 
124

 

Net income
 
20,378

 
20,377

 


 


 


 


 
1

Change in unrealized gains on investments, net
 
29,299

 


 


 
29,299

 


 


 

Foreign currency translation adjustments
 
(2,501
)
 


 


 
(2,509
)
 


 


 
8

Share-based compensation expense
 
285

 


 


 


 


 
285

 

Dividends on common shares
 
(5,780
)
 
(5,780
)
 


 


 


 


 

Ending balance
 
$
810,785

 
$
143,245

 
$
(3,801
)
 
$
90,849

 
$
732

 
$
579,413

 
$
347


 
 
 
 
Maiden Shareholders’ Equity
 
 
For the Three Months Ended March 31, 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
 
4

 


 


 


 

 
4

 

Net income
 
19,345

 
19,342

 


 


 


 


 
3

Change in unrealized gains on investments, net
 
3,499

 


 


 
3,499

 


 


 

Foreign currency translation adjustments
 
1,387

 


 


 
1,371

 


 


 
16

Share-based compensation expense
 
339

 


 


 


 


 
339

 

Dividends on common shares
 
(5,047
)
 
(5,047
)
 


 


 


 


 

Ending balance
 
$
769,976

 
$
136,070

 
$
(3,801
)
 
$
59,204

 
$
731

 
$
577,478

 
$
294




See accompanying notes to the unaudited condensed consolidated financial statements.

6



MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
(Unaudited)
 
For the Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
20,378

 
$
19,345

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
1,618

 
1,680

Net realized and unrealized gains on investments
(1,365
)
 
(47
)
Foreign exchange gains
(979
)
 
(1,062
)
Amortization of share-based compensation expense, bond premium and discount and subordinated debt discount, net
1,425

 
437

Changes in assets – (increase) decrease:
 
 
 
Reinsurance balances receivable, net
(123,101
)
 
(88,539
)
Funds withheld
(814
)
 
(4,233
)
Prepaid reinsurance premiums
(505
)
 
(2,083
)
Reinsurance recoverable on unpaid losses
(5,612
)
 
(4,779
)
Accrued investment income
(1,665
)
 
1,446

Deferred commission and other acquisition costs
(28,831
)
 
(30,162
)
Other assets
2,804

 
(2,283
)
Changes in liabilities – increase (decrease):


 


Reserve for loss and loss adjustment expenses
57,337

 
22,757

Unearned premiums
160,786

 
105,122

Accrued expenses and other liabilities
(10,251
)
 
(3,932
)
Net cash provided by operating activities
71,225

 
13,667

Cash flows from investing activities:
 
 
 
Purchases of investments:
 
 
 
Purchases of fixed-maturity securities – available-for-sale
(400,835
)
 
(156,737
)
Purchases of other investments
(308
)
 
(241
)
Sale of investments:
 
 
 
Proceeds from sales of fixed-maturity securities – available-for-sale
104,125

 
13,686

Proceeds from maturities and calls of fixed maturity securities
103,319

 
175,023

Proceeds from redemption of other investments
92

 

Decrease in restricted cash and cash equivalents
24,916

 
36,992

Purchase of capital assets
(74
)
 
(717
)
Net cash (used in) provided by investing activities
(168,765
)
 
68,006

Cash flows from financing activities:
 
 
 
Senior notes issuance, net of issuance costs
96,850

 

Repurchase agreements, net

 
(76,225
)
Common share issuance
124

 
4

Dividends paid to shareholders
(5,778
)
 
(5,047
)
Net cash provided by (used in) financing activities
91,196

 
(81,268
)
Effect of exchange rate changes on foreign currency cash
2,108

 
784

Net (decrease) increase in cash and cash equivalents
(4,236
)
 
1,189

Cash and cash equivalents, beginning of period
188,082

 
96,151

Cash and cash equivalents, end of period
$
183,846

 
$
97,340

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 condensed consolidated financial statements.

These interim condensed 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, 2011.

Certain reclassifications have been made for 2011 to conform to the 2012 presentation and have no impact on net income previously reported.

2. Recent Accounting Pronouncements

Recently Adopted Accounting Standards Updates

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board ("FASB") issued updated guidance, Accounting Standards Update ("ASU") 2011-05, 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. Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in 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, except for the provision requiring entities to present components of reclassifications of other comprehensive income on the face of the income statement, which the FASB voted to defer indefinitely during the fourth quarter of 2011. Early adoption was 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.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued ASU 2010-26, which modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 is effective for fiscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company applied the new provisions of ASU 2010-26 prospectively. As a result of adopting ASU 2010-26, commission and other acquisition costs have increased by $1,209 and net income attributable to Maiden shareholders decreased by the same amount for the three months ended March 31, 2012. The impact of the change on basic and diluted earnings per share is a decrease of $0.02. The application of the new provisions means that $2,614 of unamortized deferred acquisition costs as of January 1, 2012, that had been deferred under prior guidance, have been determined to no longer be deferrable and will be recognized as an expense over the original amortization period . If the Company had followed ASU 2010-26 in 2011, $1,424 of commission and other acquisition costs that had been deferred would have been recognized as an expense during the three months ended March 31, 2011.

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)

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, but early adoption was prohibited. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.

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 was not permitted. The adoption of this guidance did not 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 was permitted. The annual impairment test is done during the fourth quarter and the adoption of this guidance is not expected to have any effect on the Company's results of operations, financial position or liquidity.

Recently Issued Accounting Standards Updates Not Yet Adopted

Balance Sheet Offsetting

In December 2011, the FASB issued new guidance requiring additional disclosures about financial instruments and derivative instruments that are either: (1) offset for balance sheet presentation purposes or (2) subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. This guidance will be effective at January 1, 2013, with retrospective presentation of the new disclosures required. As this new guidance is disclosure-related only and does not amend the existing balance sheet offsetting guidance, the adoption of this guidance is not expected to have an impact on our results of operations, financial condition 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 March 31, 2012 and December 31, 2011 are as follows:

March 31, 2012
 
Original or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
42,752

 
$
1,499

 
$

 
$
44,251

U.S. agency bonds – mortgage-backed
 
1,070,282

 
39,881

 
(702
)
 
1,109,461

U.S. agency bonds – other
 
16,705

 
1,589

 

 
18,294

Non-U.S. government bonds
 
58,800

 
1,500

 

 
60,300

Other mortgage-backed securities
 
9,929

 
203

 

 
10,132

Corporate bonds
 
843,947

 
65,501

 
(17,409
)
 
892,039

Municipal bonds
 
64,211

 
782

 

 
64,993

Total available-for-sale fixed maturities
 
2,106,626

 
110,955

 
(18,111
)
 
2,199,470

Other investments
 
2,181

 
331

 
(82
)
 
2,430

Total investments
 
$
2,108,807

 
$
111,286

 
$
(18,193
)
 
$
2,201,900


December 31, 2011
 
Original or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
44,175

 
$
1,774

 
$

 
$
45,949

U.S. agency bonds – mortgage-backed
 
928,944

 
43,230

 
(75
)
 
972,099

U.S. agency bonds – other
 
10,374

 
622

 

 
10,996

Non-U.S. government bonds
 
52,489

 
78

 
(293
)
 
52,274

Other mortgage-backed securities
 
9,919

 
1

 

 
9,920

Corporate bonds
 
742,867

 
47,726

 
(30,236
)
 
760,357

Municipal bonds
 
168,338

 
728

 

 
169,066

Total available-for-sale fixed maturities
 
1,957,106

 
94,159

 
(30,604
)
 
2,020,661

Other investments
 
1,955

 
318

 
(81
)
 
2,192

Total investments
 
$
1,959,061

 
$
94,477

 
$
(30,685
)
 
$
2,022,853


The contractual maturities of our fixed maturities, available-for-sale as of March 31, 2012 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.

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)
March 31, 2012
 
Amortized cost
 
Fair
value
 
% of Total fair value
Maturity
 
 
 
 
 
 
Due in one year or less
 
$
36,766

 
$
37,115

 
1.7
%
Due after one year through five years
 
335,772

 
335,175

 
15.2
%
Due after five years through ten years
 
568,979

 
618,952

 
28.2
%
Due after ten years
 
84,898

 
88,635

 
4.0
%
 
 
1,026,415

 
1,079,877

 
49.1
%
U.S. agency bonds – mortgage-backed
 
1,070,282

 
1,109,461

 
50.4
%
Other mortgage-backed securities
 
9,929

 
10,132

 
0.5
%
Total
 
$
2,106,626

 
$
2,199,470

 
100.0
%

The following tables summarize our available-for-sale securities and other investments in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the securities have continuously been in an unrealized loss position:
 
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2012
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
100,421

 
$
(702
)
 
$

 
$

 
$
100,421

 
$
(702
)
Corporate bonds
 
148,267

 
(7,265
)
 
100,752

 
(10,144
)
 
249,019

 
(17,409
)
 
 
248,688

 
(7,967
)
 
100,752

 
(10,144
)
 
349,440

 
(18,111
)
Other investments
 
1,424

 
(82
)
 

 

 
1,424

 
(82
)
Total temporarily impaired available-for-sale securities and other investments
 
$
250,112

 
$
(8,049
)
 
$
100,752

 
$
(10,144
)
 
$
350,864

 
$
(18,193
)

As at March 31, 2012, there were approximately 29 securities in an unrealized loss position with a fair value of $350,864 and unrealized losses of $18,193. Of these securities, there are 6 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $100,752 and unrealized losses of $10,144.

 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2011
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
30,447

 
$
(75
)
 
$

 
$

 
$
30,447

 
$
(75
)
Non – U.S. government bonds
 
43,629

 
(293
)
 

 

 
43,629

 
(293
)
Corporate bonds
 
227,367

 
(7,406
)
 
125,089

 
(22,830
)
 
352,456

 
(30,236
)
 
 
301,443

 
(7,774
)
 
125,089

 
(22,830
)
 
426,532

 
(30,604
)
Other investments
 
1,214

 
(81
)
 

 

 
1,214

 
(81
)
Total temporarily impaired available-for-sale securities and other investments
 
$
302,657

 
$
(7,855
)
 
$
125,089

 
$
(22,830
)
 
$
427,746

 
$
(30,685
)

As at December 31, 2011, there were approximately 62 securities in an unrealized loss position with a fair value of $427,746 and unrealized losses of $30,685. Of these securities, there are 8 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $125,089 and unrealized losses of $22,830.

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)

Other-Than-Temporary Impairments ("OTTI")

We review our investment portfolio for impairment on a quarterly basis. Impairment of investments results in a charge to operations when a fair value decline below cost is deemed to be other-than-temporary. As of March 31, 2012, we reviewed our portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. During the three months ended March 31, 2012 and 2011, 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 March 31, 2012 were primarily due to widening of credit spreads relating to the market illiquidity, rather than credit events. Because we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities until a recovery of fair value to amortized cost, we currently believe it is probable that we will collect all amounts due according to their respective contractual terms. Therefore, we do not consider these fixed maturities to be other-than-temporarily impaired at March 31, 2012.

The following summarizes the credit ratings of our fixed maturities:
 
Rating* as at March 31, 2012
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
U.S. treasury bonds
 
$
42,752

 
$
44,251

 
2.0
%
U.S. agency bonds  
 
1,086,987

 
1,127,755

 
51.3
%
AAA
 
125,045

 
129,890

 
5.9
%
AA+, AA, AA-
 
133,560

 
140,473

 
6.4
%
A+, A, A-
 
370,458

 
381,185

 
17.3
%
BBB+, BBB, BBB-
 
329,467

 
358,250

 
16.3
%
BB+ or lower
 
18,357

 
17,666

 
0.8
%
Total
 
$
2,106,626

 
$
2,199,470

 
100.0
%
 
Rating* as at December 31, 2011
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
U.S. treasury bonds
 
$
44,175

 
$
45,949

 
2.3
%
U.S. agency bonds
 
939,318

 
983,095

 
48.6
%
AAA
 
160,319

 
161,945

 
8.0
%
AA+, AA, AA-
 
150,961

 
153,303

 
7.6
%
A+, A, A-
 
327,794

 
328,448

 
16.3
%
BBB+, BBB, BBB-
 
316,150

 
330,156

 
16.3
%
BB+ or lower
 
18,389

 
17,765

 
0.9
%
Total
 
$
1,957,106

 
$
2,020,661

 
100.0
%

*Ratings as assigned by Standard & Poor’s ("S&P")

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)

(b) Other Investments

The table below shows our portfolio of other investments:

 
 
March 31, 2012
 
December 31, 2011
Investments in limited partnerships
 
$
2,430

 
100.0
%
 
$
2,192

 
100.0
%
Total other investments
 
$
2,430

 
100.0
%
 
$
2,192

 
100.0
%

The Company has an unfunded commitment on its investments in limited partnerships of approximately $3,570 as of March 31, 2012.


(c) Realized and Unrealized Gains on Investment

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 $54,420 which resulted in an unrealized gain of $1,355, which is recorded in net realized and unrealized gains on investment on the Company's condensed consolidated statement of income for the three months ended March 31, 2012, respectively. The following provides an analysis of realized and unrealized gains on investment for the three months ended March 31, 2012 and 2011:

For the Three Months Ended March 31, 2012
 
Gross gains
 
Gross losses
 
Net
Other investments
 
$
11

 
$
(1
)
 
$
10

Net realized gains
 
11

 
(1
)
 
10

Unrealized gain on short sales
 
1,355

 

 
1,355

Net realized and unrealized gains on investment
 
$
1,366

 
$
(1
)
 
$
1,365


For the Three Months Ended March 31, 2011
 
Gross gains
 
Gross losses
 
Net
Available-for-sale securities
 
$
63

 
$
(16
)
 
$
47

Net realized gains on investment
 
$
63

 
$
(16
)
 
$
47



Proceeds from sales of fixed maturities classified as available-for-sale were $104,125 and $13,686 for the three months ended March 31, 2012 and 2011, respectively.

Net unrealized gains on available-for-sale securities and other investments was as follows:
 
 
March 31, 2012
 
December 31, 2011
Available-for-sale securities
 
$
92,844

 
$
63,555

Other investments
 
249

 
237

Total net unrealized gains
 
93,093

 
63,792

Deferred income tax expense
 
(57
)
 
(55
)
Net unrealized gains, net of deferred income tax
 
$
93,036

 
$
63,737

Change in net unrealized gains, net of deferred income tax
 
$
29,299

 
$
8,983



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)

d) Restricted Cash and Investments

We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trust as collateral are primarily cash and highly rated fixed maturity securities. The fair value of our restricted assets was as follows:
 
 
March 31, 2012
 
December 31, 2011
Restricted cash – third party agreements
 
$
56,146

 
$
67,627

Restricted cash – related party agreements
 
33,327

 
46,729

Restricted cash – U.S. state regulatory authorities
 
506

 
539

Total restricted cash
 
89,979

 
114,895

Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2012 – $1,001,115; 2011 – $950,103)
 
1,039,704

 
972,130

Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2012 – $630,988; 2011 – $458,105)
 
675,144

 
485,468

Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2012 – $12,754; 2011 – $12,862)
 
13,515

 
13,750

Total restricted investments
 
1,728,363

 
1,471,348

Total restricted cash and investments
 
$
1,818,342

 
$
1,586,243


(e) Other

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 March 31, 2012 were $54,420 (December 31, 2011 - $55,830) 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.

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

The Company's estimates of fair value for financial assets and financial liabilities are based on the framework established in Accounting Standards Council ("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 — Valuations based on unadjusted quoted market prices for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities, U.S. Treasury securities, and listed derivatives that are actively traded.

Level 2 — Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical 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.

Examples of assets and liabilities utilizing Level 2 inputs include: listed derivatives that are not actively traded; U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities ("MBS") and asset-backed securities ("ABS"); short-duration high yield fund, and over-the-counter ("OTC") derivatives (e.g. foreign currency options and forward contracts).

Level 3 — Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about assumptions that market participants would use.

Examples of assets and liabilities utilizing Level 3 inputs include: insurance and reinsurance derivative contracts; hedge and credit funds with partial transparency; and collateralized loan obligation ("CLO") — equity tranche securities that are traded in less liquid markets.


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 March 31, 2012.

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, 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 bonds issued by non-U.S. governments and their agencies along with supranational organizations. 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.

Other mortgage-backed securities: Other mortgage-backed securities consist of a commercial mortgage-backed security ("CMBS"). This security is priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CMBS are observable market inputs, the fair value of the CMBS is included in the Level 2 fair value hierarchy.

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)


Corporate bonds:  Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher . 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.

Municipal bonds:  Municipal bonds comprise bonds and auction rate securities issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds 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 municipal bonds are observable market inputs, municipals are classified within Level 2. Municipal auction rate securities are reported in the consolidated balance sheet at cost which approximates their fair value.

Other investments:  The fair values of the investment in limited partnerships are determined by the fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals, and as such, the fair values 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. The underlying investments of the loan are generally priced by pricing services. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of Loan to related party are included in the Level 2 fair value hierarchy.

Senior notes: The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the notes. At March 31, 2012, the fair value of the 8.25% and 8.00% senior notes were $109,650 and $99,600, respectively, . The fair values are based on quoted prices of identical instruments in inactive markets and as such, are included in the Level 2 hierarchy.

Junior subordinated debt:  The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the debt. At March 31, 2012, the fair value of the debt was $171,045 which was derived using the Black-Derman-Toy model. As the fair value of the junior subordinated debt is determined using observable market inputs in the Black-Derman-Toy model, the fair value is included in the Level 2 fair value hierarchy.


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)

(a) Fair Value Hierarchy

The following table presents the level within the fair value hierarchy at which the Company's financial assets and financial liabilities are measured on a recurring basis as of March 31, 2012 and December 31, 2011:

March 31, 2012
 
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
 
$
44,251

 
$

 
$

 
$
44,251

U.S. agency bonds – mortgage-backed
 

 
1,109,461

 

 
1,109,461

U.S. agency bonds – other
 

 
18,294

 

 
18,294

Non U.S. government bonds
 

 
60,300

 

 
60,300

Other mortgage-backed securities
 

 
10,132

 

 
10,132

Corporate bonds
 

 
892,039

 

 
892,039

Municipal bonds
 

 
64,993

 

 
64,993

Other investments
 

 

 
2,430

 
2,430

Total
 
$
44,251

 
$
2,155,219

 
$
2,430

 
$
2,201,900

As a percentage of total assets
 
1.2
%
 
58.7
%
 
0.1
%
 
60.0
%
Liabilities
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
 
$

 
$
54,420

 
$

 
$
54,420

As a percentage of total liabilities
 
%
 
1.9
%
 
%
 
1.9
%

December 31, 2011
 
Quoted Prices
in Active
Markets for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
45,949

 
$

 
$

 
$
45,949

U.S. agency bonds – mortgage-backed
 

 
972,099

 

 
972,099

U.S. agency bonds – other
 

 
10,996

 

 
10,996

Non-U.S. government bonds
 

 
52,274

 

 
52,274

Other mortgage-backed securities
 

 
9,920

 

 
9,920

Corporate bonds
 

 
760,357

 

 
760,357

Municipal bonds
 

 
169,066

 

 
169,066

Other investments
 

 

 
2,192

 
2,192

Total
 
$
45,949

 
$
1,974,712

 
$
2,192

 
$
2,022,853

As a percentage of total assets
 
1.4
%
 
58.8
%
 
0.1
%
 
60.3
%
Liabilities
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
 
$

 
$
55,830

 
$

 
$
55,830

As a percentage of total liabilities
 
%
 
2.2
%
 
%
 
2.2
%


17

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


4. Fair Value of Financial Instruments (continued)

(b) Level 3 Financial Instruments

The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis for the three months ended March 31, 2012 and 2011:

 
 
For the Three Months Ended March 31,
Other investments:
 
2012
 
2011
Balance at beginning of period
 
$
2,192

 
$
5,847

Net realized and unrealized gains – included in net income
 
10

 

Net realized and unrealized losses – included in net income
 

 

Change in net unrealized gains – included in other comprehensive income
 
12

 
234

Change in net unrealized losses – included in other comprehensive income
 

 

Purchases
 
308

 
241

Sales and redemptions
 
(92
)
 

Transfers into Level 3
 

 

Transfers out of Level 3
 

 

Balance at end of period
 
$
2,430

 
$
6,322

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.

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 March 31, 2012 and December 31, 2011:

March 31, 2012
 
Gross
 
Accumulated Amortization
 
Net
 
Useful Life
Goodwill
 
$
58,312

 
$

 
$
58,312

 
Indefinite
State licenses
 
7,727

 

 
7,727

 
Indefinite
Customer relationships
 
51,400

 
(19,774
)
 
31,626

 
15 years double declining
Net balance
 
$
117,439

 
$
(19,774
)
 
$
97,665

 
 




18

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)

December 31, 2011
 
Gross
 
Accumulated Amortization
 
Net
 
Useful Life
Goodwill
 
$
58,312

 
$

 
$
58,312

 
Indefinite
State licenses
 
7,727

 

 
7,727

 
Indefinite
Customer relationships
 
51,400

 
(18,684
)
 
32,716

 
15 years double declining
Net balance
 
$
117,439

 
$
(18,684
)
 
$
98,755

 
 

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 months ended March 31, 2012 and 2011. The estimated amortization expenses for the next five years are:

2012
$
3,272

2013
3,781

2014
3,276

2015
2,840

2016
2,461


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 ("2011 Senior Notes") due on June 15, 2041, which are fully and unconditionally guaranteed by the Company.  The 2011 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 up to but excluding the redemption date.  In order to ensure that issuance of the 2011 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 2011 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 2011 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 2011 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 2011 Senior Notes offering were used to repurchase the Trust Preferred Securities of the holders who accepted the offer.  The 2011 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 2011 Senior Notes, based on the net proceeds received, was 8.47%. The net proceeds from the sale of the 2011 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 2011 Senior Notes were capitalized and will be amortized over the life of the notes.

The interest on the 2011 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 ended March 31, 2012 and 2011 were $2,217 and $0, respectively, out of which $394 was accrued as of March 31, 2012 (December 31, 2011 - $394).

In March 2012, the Company, through Maiden NA, issued $100,000 principal amount of 8.00% Senior Notes ("2012 Senior Notes") due on March 27, 2042, which are fully and unconditionally guaranteed by the Company. The 2012 Senior Notes are redeemable for cash, in whole or in part, on or after March 27, 2017, at 100% of the principal amount to be redeemed plus accrued and unpaid interest up to but excluding the redemption date. The 2012 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 2012 Senior Notes, based on the net proceeds received, was 8.28%. The net proceeds from the sale of the 2012 Senior Notes were $96,594, after placement agent fees and other expenses of $3,406, out of which $3,150 was paid during the three months ended March 31, 2012, and will be used for general corporate purposes and working capital. The issuance costs related to the 2012 Senior Notes were capitalized and will be amortized over the life of the notes.

The interest on the 2012 Senior Notes is payable each quarter beginning on June 27, 2012 and will include accrued interest from March 27, 2012. Interest expense for the three months ended March 31, 2012 was $111 out of which $111 was accrued as of March 31, 2012.
 

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)

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.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 2011 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 in 2011 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 in 2011 which amounted to $20,313.

As of March 31, 2012, the stated value of the Junior Subordinated Debt was $126,276 which comprises the principal amount of $152,500 and unamortized discount of $26,224. Amortization expense for the three months ended March 31, 2012 was $13, (March 31, 2011 - $18).  Interest expense for the three months ended March 31, 2012 was $5,337 (March 31, 2011 - $9,100), out of which $4,448 was accrued as of March 31, 2012 (December 31, 2011 - $4,448).

7. Earnings per Common Share

The following is a summary of the elements used in calculating basic and diluted earnings per common share:
 
For the Three Months Ended March 31,
 
2012
 
2011
Net income attributable to Maiden shareholders
$
20,377

 
$
19,342

Weighted average number of common shares outstanding – basic
72,226,329

 
72,107,194

Potentially dilutive securities:
 
 
 
Share options
830,094

 
666,720

Weighted average number of common shares outstanding – diluted
73,056,423

 
72,773,914

Basic earnings per share attributable to Maiden shareholders:
$
0.28

 
$
0.27

Diluted earnings per share attributable to Maiden shareholders:
$
0.28

 
$
0.27


As of March 31, 2012, 2,079,180 share options (March 31, 2011 - 2,249,670) were excluded from the calculation of diluted earnings per common share as they were anti-dilutive.



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

The Company’s 2007 Share Incentive Plan (the "Plan"), as amended, provides for grants of options, restricted shares and restricted share units. The total number of shares currently reserved for issuance under the Plan is 10,000,000 common shares. The Plan is administered by the Compensation Committee of the Board of Directors. Exercise prices of options will be established at or above the fair market value of the Company’s common shares at the date of grant. Under the Plan, unless otherwise determined by the Compensation Committee and provided in an award agreement, 25% of the options will become exercisable on the first anniversary of the grant date, with an additional 6.25% of the options vesting each quarter thereafter based on the grantee’s continued employment over a four-year period, and will expire ten years after grant date.

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 judgments 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$285 for the three months ended March 31, 2012 (March 31, 2011 - $339).

The key assumptions used in determining the fair value of options granted in the three months ended March 31, 2012 and a summary of the methodology applied to develop each assumption are as follows:

 
For the Three Months Ended March 31, 2012
Assumptions:
 
 
Volatility
45.55 – 47.60

%
Risk-free interest rate
1.29 – 1.62

%
Weighted average expected lives in years
 6.1 years

 
Forfeiture rate

%
Dividend yield rate
3.04 – 3.27

%

Expected Price Volatility — This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. It was not possible to use actual experience to estimate the expected volatility of the price of the common shares in estimating the value of the options granted because the Company's common shares only began trading in May 2008, thus, it does not have enough history over which to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for such estimate, the Company blended its historical volatility with the historical 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.

Dividend Yield — This is calculated by dividing the expected annual dividend by the stock price of the Company at the valuation date. An increase in the dividend yield 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 schedule shows all options granted, exercised, expired and forfeited under the Plan for the three months ended March 31, 2012 and 2011.

 
Number of
Share
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
Outstanding, December 31, 2011
2,916,143

 
$
6.61

 
7.55 years
Granted
22,500

 
$
9.42

 
9.90 years
Exercised
(35,384
)
 
$
4.10

 

Expired
(51,033
)
 
$
9.86

 

Forfeited
(2,625
)
 
$
7.10

 

Outstanding, March 31, 2012
2,849,601

 
$
6.55

 
7.35 years
 
Number of
Share
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
Outstanding, December 31, 2010
2,940,876

 
$
6.41

 
8.40 years
Granted
7,500

 
$
7.69

 
9.95 years
Exercised
(998
)
 
$
3.28

 

Expired

 
$

 

Forfeited
(41,313
)
 
$
7.21

 

Outstanding, March 31, 2011
2,906,065

 
$
6.41

 
8.13 years

The weighted average grant date fair value was $2.00 and $1.92 for all options outstanding at March 31, 2012 and 2011, respectively. There was approximately $2,157 and $3,002 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of March 31, 2012 and 2011, respectively.


Performance-Based Restricted Share Units (PB-RSUs)

The Compensation Committee of the Board of Directors approved the formation of a long-term incentive program under the Plan on March 1, 2011. On that date, the Committee determined to award PB-RSUs to executive officers and senior Company employees. The formula for determining the amount of PB-RSUs awarded uses a combination of a percentage of the employee's base salary (based on a benchmarking analysis from our compensation consultant) divided by the closing price on NASDAQ Global Select Market of our common shares on that date. The grants are performance based which require that certain criteria such as return on equity, underwriting performance, revenue growth and operating expense be met during the performance period to attain a payout. Each metric has a corresponding weighted percentage with a target, threshold and maximum level of performance goal set to achieve a payout. Settlement of the grants can be made in either common shares or cash upon the decision of the Compensation Committee of the Company. The first performance cycle is for two years, 2011-2012, and subsequent performance cycles will be for three years. For the period ended March 31, 2012, no accrual was recognized as the calculated weighted percentage of the performance results of the Company did not meet the target level.


9. Dividends Declared

On February 22, 2012, the Company's Board of Directors approved a quarterly dividend of $0.08 per common share, payable on April 16, 2012 to shareholders of record on April 2, 2012.







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 are Michael Karfunkel, George Karfunkel and Barry Zyskind.Michael Karfunkel is the non-executive chairman of the board of AmTrust Financial Services, Inc. ("AmTrust"), George Karfunkel is a director of AmTrust, and Barry Zyskind is the president, chief executive officer and director of AmTrust. The Founding Shareholders own or control approximately 60% of the outstanding shares of AmTrust. In addition, the Michael Karfunkel 2005 Grantor Retained Annuity Trust (which is controlled by Michael Karfunkel) currently owns 72.4% of the issued and outstanding common stock of American Capital Acquisition Corp. ("ACAC"), Michael Karfunkel currently owns 27.6% of ACAC's issued and outstanding common stock, and AmTrust owns preferred shares convertible into 21.25% of the issued and outstanding common stock of ACAC (see below for a description of our common business arrangements with AmTrust and ACAC). Michael Karfunkel is the non-executive chairman of the board of directors of ACAC.

AmTrust

The following describes transactions between the Company and AmTrust and its subsidiaries.

AmTrust Quota Share Reinsurance Agreement

In July 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 subsidiary, AmTrust International Insurance, Ltd. ("AII"), to enter into a quota share reinsurance agreement (the "Reinsurance Agreement") by which AII retrocedes to Maiden Bermuda an amount equal to 40% of the premium written by AmTrust's U.S., Irish and U.K. insurance subsidiaries, 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 with respect to the current lines of business (excluding personal lines reinsurance business and certain specialty property and casualty lines written in AmTrust's Specialty Risk and Extended Warranty segment which Maiden Bermuda declined to reinsure) , excluding risks for which the AmTrust subsidiaries' net retention exceeds $5,000 ("Covered Business"). Effective January 1, 2010, we agreed to assume our proportionate share of AmTrust's workers' compensation exposure and shared the benefit of the 2010 excess reinsurance protection. 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 Reinsurance Agreement further provided that AII receives a ceding commission of 31% of ceded written premiums.

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 Reinsured or Maiden Bermuda elects to terminate this Reinsurance Agreement effective as of July 1, 2014 or as of the expiration of any successive three-year period. If the AII or Maiden Bermuda elects to so terminate this Reinsurance 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. 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 shareholder's equity of Maiden Bermuda or the combined shareholders' equity of AII and the AmTrust subsidiaries.

The Company recorded approximately $43,879 of ceding commission expense for the three months ended March 31, 2012 (March 31, 2011 - $35,806) 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.  

23

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 agreement has an initial term of one year, has been automatically renewed for one year, and can be terminated at any April 1 by either party on four months' notice. For the three months ended March 31, 2012, the Company recorded approximately $1,192 (March 31, 2011 - $0) 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.

Effective September 1, 2010, the Company through its indirect wholly-owned subsidiary, Maiden Specialty Insurance Company ("Maiden Specialty"), entered into a quota share reinsurance agreement with Technology Insurance Company, Inc. ("Technology"), a subsidiary of AmTrust. Under the agreement, Maiden Specialty will cede (a) 90% of its credit insurance business written under the Open Lending Program ("OPL") and (b) 100% of its general liability business under the Naxos Avondale Specialty Casualty Program ("NAXS"). Maiden Specialty's involvement is limited to certain states where Technology is not fully licensed. The agreement also provides that Maiden Specialty receives a ceding commission of 5% of ceded written premiums. The reinsurance agreement has a term of three years and will remain continuously in force until terminated in accordance to the provisions set forth in the contract. Maiden Specialty recorded approximately $2,300 of premiums earned ceded and $696 ceding commission for the three months ended March 31, 2012 (March 31, 2011 - $502 and $147, respectively).

Effective September 1, 2010, the Company, through its indirect wholly-owned subsidiary, Maiden Reinsurance Company ("Maiden US"), entered into a reinsurance agreement with Security National Insurance Company ("SNIC"), a subsidiary of AmTrust. Under the agreement, SNIC will cede 80% of the gross liabilities produced under the Southern General Agency program to Maiden US. The agreement provides SNIC with a 5% commission of ceded written premiums. The agreement has a term of one year. Under this agreement, Maiden US recorded approximately $284 of premiums earned and $82 commission expense for the three months ended March 31, 2012 (March 31, 2011 - $7 and $0.1, respectively).
 
Collateral provided to AmTrust

In order to provide AmTrust's U.S. insurance subsidiaries with credit for reinsurance on their statutory financial statements, AII, as the direct reinsurer of the AmTrust's insurance subsidiaries, has established trust accounts ("Trust Accounts") for their benefit. Maiden Bermuda has agreed to provide appropriate collateral to secure its proportional share under the Master Agreement of AII's obligations to the AmTrust subsidiaries to whom AII is required to provide collateral. This collateral may be in the form of (a) assets loaned by Maiden Bermuda to AII, for deposit into the Trust Accounts, pursuant to a loan agreement between those parties, (b) assets transferred by Maiden Bermuda, for deposit into the Trust Accounts, (c) a letter of credit obtained by Maiden Bermuda and delivered to an AmTrust subsidiary on AII's behalf (a "Letter of Credit"), or (d) premiums withheld by an AmTrust subsidiary at Maiden Bermuda's request in lieu of remitting such premiums to AII (“Withheld Funds”). Maiden Bermuda may provide any or a combination of these forms of collateral, provided that the aggregate value thereof equals Maiden Bermuda's proportionate share of its obligations under the Master Agreement with AII. The amount of collateral Maiden Bermuda is required to maintain, which is determined quarterly, equals its proportionate share of (a) the amount of ceded paid losses for which AII is responsible to such AmTrust subsidiaries but has not yet paid, (b) the amount of ceded loss reserves (including ceded reserves for claims reported but not resolved and losses incurred but not reported) for which AII is responsible to AmTrust subsidiaries, and

(c) the amount of ceded reserves for unearned premiums ceded by AmTrust subsidiaries to AII.

Maiden Bermuda satisfied its collateral requirements under the Reinsurance Agreement with AII as follows:

by lending funds in the amount of $167,975 as at March 31, 2012 and December 31, 2011 to AII pursuant to a loan agreement entered into between those parties. This loan is carried at cost. Pursuant to the Master Agreement, AmTrust has agreed to cause AII not to commingle Maiden Bermuda's assets with AII's other assets and to cause the AmTrust subsidiaries not to commingle Maiden Bermuda's assets with the AmTrust subsidiaries' other assets if an AmTrust subsidiary withdraws those assets. AII has agreed that, if an AmTrust subsidiary returns to AII excess assets withdrawn from a Trust Account, drawn on a Letter of Credit or maintained by such AmTrust subsidiary as Withheld Funds, AII will immediately return to Maiden Bermuda its proportionate share of such excess assets. AII has further agreed that if the aggregate fair market value of the amount of Maiden Bermuda's assets held in the Trust Account exceeds Maiden Bermuda's proportionate share of AII's obligations, or if an AmTrust subsidiary misapplies any such collateral, AII will immediately return to Maiden Bermuda an amount equal to such excess or misapplied collateral, less any amounts AII has paid to Maiden Bermuda.

24

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)

In addition, if an AmTrust subsidiary withdraws Maiden Bermuda's assets from a Trust Account and maintains those assets on its books as withheld funds, AII has agreed to pay to Maiden Bermuda interest at the rate equivalent to the one-month London Interbank Offered Rate ("LIBOR") plus 90 basis points per annum computed on the basis of a 360-day year on the loan (except to the extent Maiden Bermuda's proportionate share of AII's obligations to that AmTrust subsidiary exceeds the value of the collateral Maiden Bermuda has provided), and net of unpaid fees Maiden Bermuda owes to AIIM and its share of fees owed to the trustee of the Trust Account; and

effective December 1, 2008, the Company entered into a Reinsurer Trust Assets Collateral agreement to provide to AII sufficient collateral to secure its proportional share of AII's obligations to the U.S. AmTrust subsidiaries. The amount of the collateral, as at March 31, 2012 was approximately $630,589 (December 31, 2011 - $461,216) and the accrued interest was $4,702 (December 31, 2011 - $4,131). (See Note 3(d)).

Reinsurance Brokerage Agreements

Effective July 1, 2007, the Company entered into a reinsurance brokerage agreement with AII Reinsurance Broker Ltd. ("AIIB"), a subsidiary of AmTrust. Pursuant to the brokerage agreement, AIIB provides brokerage services relating to the Reinsurance Agreement and, beginning on April 1, 2011, the European Hospital Liability Quota Share agreement for a fee equal to 1.25% of premium assumed under the contracts. The brokerage fee is payable in consideration of AIIB's brokerage services. AIIB is not the Company's exclusive broker.  AIIB may, if mutually agreed, also produce reinsurance business for the Company from other ceding companies, and in such cases the Company will negotiate a mutually acceptable commission rate. Following the initial one-year term, the agreement may be terminated upon 30 days written notice by either party. The Company recorded approximately $2,098 of reinsurance brokerage expense for the three months ended March 31, 2012 (March 31, 2011 - $1,431) and deferred reinsurance brokerage of $5,632 as of March 31, 2012 (December 31, 2011 - $4,891) as a result of these agreements.

The Company paid brokerage fees to AmTrust's subsidiary AmTrust North America of $0 for the three months ended March 31, 2012 (March 31, 2011 - $37) for acting as insurance intermediary in relation to certain insurance placements.

Asset Management Agreement

Effective July 1, 2007, the Company entered into an asset management agreement with AII Insurance Management Limited ("AIIM"), an AmTrust subsidiary, pursuant to which AIIM has agreed to provide investment management services to the Company. Pursuant to the asset management agreement, AIIM provides investment management services for a quarterly fee of 0.05% if the average value of the account for the previous calendar quarter is less than or equal to $1 billion and 0.0375% if the average value of the account for the previous calendar quarter is greater than $1 billion. Following the initial one-year term, the agreement may be terminated upon 30 days written notice by either party. The Company recorded approximately $830 of investment management fees for the three months ended March 31, 2012 (March 31, 2011 - $793) as a result of this agreement.
 
Other

On March 1, 2011, the Company entered into a time sharing agreement for the lease of aircraft owned by AmTrust Underwriters, Inc. ("AUI"), a wholly-owned subsidiary of AmTrust. The lease is for 10 months ending on December 31, 2011 and will automatically renew for successive one-year terms unless terminated in accordance with the provisions of the agreement. Pursuant to the agreement, the Company will reimburse AUI for actual expenses incurred as allowed by Federal Aviation Regulations.  For the three months ended March 31, 2012, the Company recorded an expense of $19 (March 31, 2011 - $0) for the use of the aircraft.

ACAC

The following describes transactions between the Company and ACAC and its subsidiaries:

ACAC Quota Share Reinsurance Agreement

Maiden Bermuda, effective March 1, 2010, reinsures 25% of the net premiums of the GMAC personal lines business, pursuant to a quota share reinsurance agreement ("ACAC Quota Share") with the GMAC personal lines insurance companies, as cedents, and Maiden Bermuda, American Capital Partners Re, Ltd., a Bermuda reinsurer which is a wholly-owned indirect subsidiary of the Annuity Trust, and Technology, as reinsurers. The Company has a 50% participation in the ACAC Quota Share, by which it receives 25% of net premiums of the personal lines business. The ACAC Quota Share provides that the reinsurers, severally, in accordance with their participation percentages, shall receive 50% of the net premium of the GMAC personal lines insurance companies and assume 50% of the related net losses. The ACAC Quota Share has an initial term of three years and shall renew automatically for successive three year terms unless terminated by written notice not less than nine months prior to the expiration of the current term.

25

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)

Notwithstanding the foregoing, Maiden Bermuda's participation in the ACAC Quota Share may be terminated by ACAC on 60 days written notice in the event Maiden Bermuda becomes insolvent, is placed into receivership, its financial condition is impaired by 50% of the amount of its surplus at the inception of the ACAC Quota Share or latest anniversary, whichever is greater, is subject to a change of control, or ceases writing new and renewal business. ACAC also may terminate the agreement on nine months written notice following the effective date of initial public offering or private placement of stock by ACAC or a subsidiary. Maiden Bermuda may terminate its participation in the ACAC Quota Share on 60 days written notice in the event ACAC is subject to a change of control, cease writing new and renewal business, effects a reduction in their net retention without Maiden Bermuda's consent or fails to remit premium as required by the terms of the ACAC Quota Share.

The ACAC Quota Share provides that the reinsurers pay a provisional ceding commission equal to 32.5% of ceded earned premium, net of premiums ceded by the personal lines companies for inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is 60.5% or less and a minimum of 30.5% if the loss ratio is 64.5% or higher. We believe that the terms, conditions and pricing of the ACAC Quota Share have been determined by arm's length negotiations and reflect current market terms and conditions.

Maiden Bermuda recorded approximately $20,177 of ceding commission expense for the three months ended March 31, 2012 (March 31, 2011 - $17,637) as a result of this transaction.

Other

Maiden Specialty entered into a reinsurance arrangement with New South Insurance Company ("New South"), a subsidiary of ACAC. Pursuant to the agreement, Maiden Specialty cedes 100% of certain personal lines business to New South. On March 1, 2010, Maiden Specialty entered into a novation agreement with Motors and New South whereby New South replaced Motors as the reinsurer for all of this business. For the three months ended March 31, 2012, Maiden Specialty recorded approximately $0 of ceded premium and $0 of ceding commissions (March 31, 2011 - $0.5 and $0.2, respectively).

In June 2011, the Company, through Maiden NA, issued $107,500 principal amount of 8.25% Senior Notes due on June 15, 2041, which are fully and unconditionally guaranteed by the Company.  The proceeds from the 8.25% Senior Notes were used to repurchase on a pro rata basis $107,500 of the $260,000 outstanding Trust Preferred Securities.  The Company offered all Trust Preferred Securities holders the option to have their securities repurchased on the same terms.  American Capital Partners Re, Ltd., an entity owned by the Annuity Trust controlled by Michael Karfunkel  accepted the offer to repurchase its $79,066 in principal amount of Trust Preferred Securities on July 15, 2011.  George Karfunkel purchased $25,000, and ACAC and AII each purchased $12,500 of the principal amount of the 8.25% Senior Notes.  The Company's Audit Committee reviewed and approved ACAC's, AII's, and George Karfunkel's participation in the 8.25% Senior Notes offering.

11. Segments

The Company currently operates three business segments, Diversified Reinsurance, AmTrust Quota Share Reinsurance and the ACAC Quota Share. The Company evaluates segment performance based on segment profit separately from the results of our investment portfolio. Other operating expenses allocated to the segments are called General and Administrative expenses which are allocated on an actual basis except salaries and benefits where management’s judgment is applied; the Company does not allocate general corporate expenses to the segments. In determining total assets by segment the Company identifies those assets that are attributable to a particular segment such as reinsurance balances receivable, funds withheld, prepaid reinsurance premiums, reinsurance recoverable on unpaid losses, deferred commission and other acquisition expenses, loans, goodwill and intangible assets, and restricted cash and investments. All remaining assets are allocated to Corporate.

The fee-generating business associated with the IIS Acquisition ("IIS Fee Business") which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. Certain portions of the IIS Fee Business are directly associated with the underlying reinsurance contracts recorded in the Diversified Reinsurance segment. To the extent that the fees are generated on underlying insurance contracts sold to third parties that are then ceded under quota share reinsurance contracts to Maiden Bermuda, a proportionate share of the fee is offset against the related acquisition expense. To the extent that IIS Fee Business is not directly associated with premium revenue generated under the applicable reinsurance contracts, that fee revenue is separately reported on the line captioned “Other insurance revenue” in the Company's Condensed Consolidated Statements of Income.

26

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




11. Segments (continued)

The following tables summarize the underwriting results of our operating segments:

For the Three Months Ended March 31, 2012

Diversified Reinsurance

AmTrust Quota Share Reinsurance

ACAC
Quota Share

Total
Net premiums written

$
288,296


$
226,015


$
76,522


$
590,833

Net premiums earned

$
204,463


$
167,879


$
66,154


$
438,496

Other insurance revenue

4,754






4,754

Net loss and loss adjustment expenses

(132,392
)

(112,856
)

(42,669
)

(287,917
)
Commission and other acquisition expenses

(64,149
)

(47,169
)

(20,940
)

(132,258
)
General and administrative expenses

(10,448
)

(379
)

(173
)

(11,000
)
Underwriting income

$
2,228


$
7,475


$
2,372


$
12,075

Reconciliation to net income attributable to Maiden shareholders












Net investment income and realized
and unrealized gains on investment










19,802

Amortization of intangible assets










(1,090
)
Foreign exchange gains










979

Interest and amortization expenses










(7,678
)
Other general and administrative expenses










(2,831
)
Income tax expense










(879
)
Income attributable to noncontrolling interest










(1
)
Net income attributable to Maiden shareholders










$
20,377














Net loss and loss expense ratio*

63.3
%

67.2
%

64.5
%

65.0
%
Acquisition cost ratio**

30.7
%

28.1
%

31.7
%

29.8
%
General and administrative expense ratio***

4.9
%

0.2
%

0.2
%

3.1
%
Combined ratio****

98.9
%

95.5
%

96.4
%

97.9
%

27

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




11. Segments (continued)

For the Three Months Ended March 31, 2011
 
Diversified Reinsurance
 
AmTrust Quota Share Reinsurance
 
ACAC
Quota Share
 
Total
Net premiums written
 
$
258,818

 
$
126,714

 
$
63,968

 
$