Q3 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 September 30, 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 November 5, 2012, the number of the Registrant's Common Stock ($.01 par value) outstanding was 72,282,493.






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)
 
September 30, 2012 (Unaudited)
 
December 31, 2011 (Audited)
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (Amortized cost 2012: $2,472,806; 2011: $1,957,106)
$
2,610,012

 
$
2,020,661

Other investments, at fair value (Cost 2012: $2,530; 2011: $1,955)
2,826

 
2,192

Total investments
2,612,838

 
2,022,853

Cash and cash equivalents
66,877

 
188,082

Restricted cash and cash equivalents
115,324

 
114,895

Accrued investment income
21,329

 
13,215

Reinsurance balances receivable, net (includes $210,913 and $178,745 from related parties in 2012 and 2011, respectively)
449,186

 
423,355

Funds withheld
41,927

 
42,605

Prepaid reinsurance premiums (includes $1,307 and $7,265 from related parties in 2012 and 2011, respectively)
43,621

 
35,381

Reinsurance recoverable on unpaid losses (includes $9,369 and $7,207 from related parties in 2012 and 2011, respectively)
29,110

 
20,289

Loan to related party
167,975

 
167,975

Deferred commission and other acquisition expenses (includes $179,411 and $147,743 from related parties in 2012 and 2011, respectively)
274,587

 
248,436

Goodwill and intangible assets, net
95,484

 
98,755

Other assets
30,857

 
19,270

Total assets
$
3,949,115

 
$
3,395,111

LIABILITIES
 
 
 
Reserve for loss and loss adjustment expenses (includes $521,778 and $396,198 from related parties in 2012 and 2011, respectively)
$
1,547,103

 
$
1,398,438

Unearned premiums (includes $595,746 and $483,935 from related parties in 2012 and 2011, respectively)
976,689

 
832,047

Accrued expenses and other liabilities
63,318

 
161,883

Senior notes
207,500

 
107,500

Junior subordinated debt
126,303

 
126,263

Total liabilities
2,920,913

 
2,626,131

Commitments and Contingencies


 


EQUITY
 
 
 
Preference shares - Series A
150,000

 

Common shares ($0.01 par value; 73,244,825 and 73,183,764 shares issued in 2012 and 2011, respectively; 72,282,489 and 72,221,428 shares outstanding in 2012 and 2011, respectively)
732

 
732

Additional paid-in capital
575,293

 
579,004

Accumulated other comprehensive income
137,441

 
64,059

Retained earnings
168,141

 
128,648

Treasury shares, at cost (2012 and 2011: 962,336 shares)
(3,801
)
 
(3,801
)
Total Maiden shareholders’ equity
1,027,806

 
768,642

Noncontrolling interest in subsidiaries
396

 
338

Total equity
1,028,202

 
768,980

Total liabilities and equity
$
3,949,115

 
$
3,395,111

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,
 
For the Nine Months Ended September 30,
 
2012

2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Gross premiums written
$
478,515

 
$
451,130

 
$
1,536,955

 
$
1,384,302

Net premiums written
$
455,847

 
$
428,586

 
$
1,458,640

 
$
1,315,052

Change in unearned premiums
(6,874
)
 
(8,309
)
 
(134,055
)
 
(180,457
)
Net premiums earned
448,973

 
420,277

 
1,324,585

 
1,134,595

Other insurance revenue
2,622

 
4,530

 
9,650

 
11,364

Net investment income
21,550

 
18,749

 
60,072

 
57,708

Net realized and unrealized gains (losses) on investment
2,410

 
(2,900
)
 
836

 
(2,262
)
Total revenues
475,555

 
440,656

 
1,395,143

 
1,201,405

Expenses:
 
 
 
 
 
 
 
Net loss and loss adjustment expenses
309,146

 
274,504

 
897,498

 
746,285

Commission and other acquisition expenses
120,923

 
126,777

 
367,844

 
339,673

General and administrative expenses
13,578

 
12,475

 
42,617

 
37,607

Interest and amortization expenses
9,569

 
8,178

 
26,815

 
26,588

Accelerated amortization of junior subordinated debt discount and issuance cost

 

 

 
20,313

Junior subordinated debt repurchase expense

 

 

 
15,050

Amortization of intangible assets
1,090

 
1,258

 
3,271

 
3,775

Foreign exchange (gains) losses
(1,213
)
 
1,103

 
(1,318
)
 
(898
)
Total expenses
453,093

 
424,295

 
1,336,727

 
1,188,393

Income before income taxes
22,462

 
16,361

 
58,416

 
13,012

Income taxes:
 
 
 
 
 
 
 
Current tax expense
397

 
203

 
880

 
1,299

Deferred tax expense
131

 
156

 
618

 
738

Income tax expense
528

 
359

 
1,498

 
2,037

Net income
21,934

 
16,002

 
56,918

 
10,975

Less: (income) loss attributable to noncontrolling interest
(15
)
 
2

 
(81
)
 
5

Net income attributable to Maiden common shareholders
$
21,919

 
$
16,004

 
$
56,837

 
$
10,980

Basic earnings per share attributable to Maiden common shareholders
$
0.30

 
$
0.22

 
$
0.79

 
$
0.15

Diluted earnings per share attributable to Maiden common shareholders
$
0.30

 
$
0.22

 
$
0.78

 
$
0.15

Dividends declared per common share
$
0.08

 
$
0.08

 
$
0.24

 
$
0.22


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,
 
For the Nine Months Ended September 30,
 
2012

2011
 
2012
 
2011
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
21,934

 
$
16,002

 
$
56,918

 
$
10,975

Other comprehensive income
 
 
 
 

 

Net unrealized holding gains on available-for-sale securities arising during the period
45,986

 
33

 
76,098

 
21,795

Adjustment for reclassification of net realized (gains) losses recognized in net income
(2,410
)
 
65

 
(2,429
)
 
(75
)
Foreign currency translation adjustment
(1,700
)
 
(3,206
)
 
(292
)
 
(1,291
)
Other comprehensive income (loss)
41,876

 
(3,108
)
 
73,377

 
20,429

Comprehensive income
63,810

 
12,894

 
130,295

 
31,404

Net (income) loss attributable to noncontrolling interest
(15
)
 
2

 
(81
)
 
5

Other comprehensive loss (income) attributable to noncontrolling interest
7

 
22

 
5

 
(1
)
Comprehensive (income) loss attributable to noncontrolling interest
(8
)
 
24

 
(76
)
 
4

Comprehensive income attributable to Maiden common shareholders
$
63,802

 
$
12,918

 
$
130,219

 
$
31,408



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)
 
 
For the Nine Months Ended September 30
 
 
2012
 
2011
Preference shares - Series A
 
 
 
 
Beginning balance
 
$

 
$

Issuance of preference shares
 
150,000

 

Ending balance
 
$
150,000

 
$

Common shares
 
 
 
 
Beginning balance
 
732

 
731

Exercise of options and issuance of shares
 

 
1

Ending balance
 
$
732

 
$
732

Additional paid-in capital
 
 
 
 
Beginning balance
 
579,004

 
577,135

Exercise of options and issuance of common shares
 
253

 
347

Issuance costs of preference shares
 
(4,959
)
 

Partial disposal of interest in subsidiary
 

 
141

Share based compensation expense
 
995

 
1,011

Ending balance
 
$
575,293

 
$
578,634

Accumulated other comprehensive income
 
 
 
 
Beginning balance
 
64,059

 
54,334

Change in net unrealized gains on investments
 
73,669

 
21,720

Foreign currency translation adjustment
 
(287
)
 
(1,292
)
Ending balance
 
$
137,441

 
$
74,762

Retained earnings
 
 
 
 
Beginning balance
 
128,648

 
121,775

Net income attributable to Maiden common shareholders
 
56,837

 
10,980

Dividends on common shares
 
(17,344
)
 
(15,873
)
Ending balance
 
$
168,141

 
$
116,882

Treasury shares
 
 
 
 
Beginning balance
 
(3,801
)
 
(3,801
)
Ending balance
 
$
(3,801
)
 
$
(3,801
)
Noncontrolling interest in subsidiaries
 
 
 
 
Beginning balance
 
338

 
275

Partial disposal of interest in subsidiary
 

 
69

Dividend paid to noncontrolling interest
 
(18
)
 

Net income (loss) attributable to noncontrolling interest
 
81

 
(5
)
Foreign currency translation adjustment
 
(5
)
 
1

Ending balance
 
$
396

 
$
340

Total equity
 
$
1,028,202

 
$
767,549


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,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
56,918

 
$
10,975

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
4,755

 
6,828

Net realized and unrealized (gains) losses on investments
(836
)
 
2,262

Foreign exchange gains
(1,318
)
 
(898
)
Amortization of share-based compensation expense, bond premium and discount and subordinated debt discount, net
6,493

 
20,248

Changes in assets – (increase) decrease:
 
 
 
Reinsurance balances receivable, net
(26,003
)
 
(170,546
)
Funds withheld
883

 
16,402

Prepaid reinsurance premiums
(8,240
)
 
(10,347
)
Reinsurance recoverable on unpaid losses
(8,818
)
 
(5,917
)
Accrued investment income
(8,094
)
 
2,749

Deferred commission and other acquisition expenses
(26,164
)
 
(44,635
)
Other assets
(9,551
)
 
(9,650
)
Changes in liabilities – increase (decrease):


 


Reserve for loss and loss adjustment expenses
148,304

 
100,223

Unearned premiums
145,203

 
191,135

Accrued expenses and other liabilities
(5,385
)
 
(3,719
)
Net cash provided by operating activities
268,147

 
105,110

Cash flows from investing activities:
 
 
 
Purchases of fixed-maturity securities – available-for-sale
(1,013,988
)
 
(359,140
)
Purchases of fixed-maturity securities – trading and short sale
(102,073
)
 
(825,703
)
Purchases of other investments
(794
)
 
(1,026
)
Proceeds from sales of fixed-maturity securities – available-for-sale
120,865

 
106,041

Proceeds from sales of fixed-maturity securities – trading and short sales
49,883

 
826,509

Proceeds from maturities and calls of fixed maturity securities
331,162

 
297,321

Proceeds from redemption of other investments
274

 
4,382

Increase in restricted cash and cash equivalents
(429
)
 
(7,014
)
Purchase of capital assets
(307
)
 
(1,093
)
Net cash (used in) provided by investing activities
(615,407
)
 
40,277

Cash flows from financing activities:
 
 
 
Senior notes issuance, net of issuance costs
96,594

 
104,689

Repurchase agreements, net

 
(76,225
)
Repayment of junior subordinated debt

 
(107,500
)
Preference shares - Series A issuance, net of issuance costs
145,041

 

Common share issuance
254

 
348

Dividends paid to common shareholders
(17,339
)
 
(15,144
)
Net cash provided by (used in) financing activities
224,550

 
(93,832
)
Effect of exchange rate changes on foreign currency cash
1,505

 
(1,398
)
Net (decrease) increase in cash and cash equivalents
(121,205
)
 
50,157

Cash and cash equivalents, beginning of period
188,082

 
96,151

Cash and cash equivalents, end of period
$
66,877

 
$
146,308


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" or "U.S. 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 January 1, 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 expenses have increased by $478 and $2,455 and net income attributable to Maiden shareholders decreased by the same amounts for the three and nine months ended September 30, 2012, respectively. The impact of the change on basic and diluted earnings per share is a decrease of $0.01 and $0.03 for the three and nine months ended September 30, 2012, respectively. The application of the new provisions means that $2,614 of unamortized deferred acquisition expenses 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, commission and other acquisition expenses would have increased by $340 and $2,190 for the three and nine months ended September 30, 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)

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

Qualitative Impairment Test For Indefinite-Lived Intangibles

On July 27, 2012, the FASB issued final guidance adding an optional qualitative assessment for determining whether an indefinite-lived intangible asset is impaired. This ASU 2012-02 is similar to last year's goodwill guidance which allows companies to perform a qualitative assessment to test goodwill for impairment. This guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired. If a company determines that it is more likely than not that the fair value of such as asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. However, if a company concludes otherwise, it must calculate the fair value of the asset, compare that value with its carrying amount and record an impairment charge, if any. To perform a qualitative assessment, a company must identify and evaluate changes in economic, industry and company-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. 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.

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 September 30, 2012 and December 31, 2011 are as follows:
September 30, 2012
 
Original or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
42,698

 
$
1,444

 
$

 
$
44,142

U.S. agency bonds – mortgage-backed
 
1,039,056

 
41,312

 
(1,335
)
 
1,079,033

U.S. agency bonds – other
 
16,672

 
1,544

 

 
18,216

Non-U.S. government bonds
 
55,556

 
1,367

 
(285
)
 
56,638

Other mortgage-backed bonds
 
23,167

 
812

 

 
23,979

Corporate bonds
 
1,170,400

 
99,600

 
(8,475
)
 
1,261,525

Municipal bonds
 
125,257

 
1,222

 

 
126,479

Total available-for-sale fixed maturities
 
2,472,806

 
147,301

 
(10,095
)
 
2,610,012

Other investments
 
2,530

 
351

 
(55
)
 
2,826

Total investments
 
$
2,475,336

 
$
147,652

 
$
(10,150
)
 
$
2,612,838


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 bonds
 
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 September 30, 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)
September 30, 2012
 
Amortized cost
 
Fair
value
 
% of Total fair value
Maturity
 
 
 
 
 
 
Due in one year or less
 
$
49,944

 
$
50,604

 
1.9
%
Due after one year through five years
 
376,564

 
385,644

 
14.8
%
Due after five years through ten years
 
817,467

 
900,455

 
34.5
%
Due after ten years
 
166,608

 
170,297

 
6.5
%
 
 
1,410,583

 
1,507,000

 
57.7
%
U.S. agency bonds – mortgage-backed
 
1,039,056

 
1,079,033

 
41.4
%
Other mortgage-backed bonds
 
23,167

 
23,979

 
0.9
%
Total
 
$
2,472,806

 
$
2,610,012

 
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
September 30, 2012
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
149,095

 
$
(1,335
)
 
$

 
$

 
$
149,095

 
$
(1,335
)
Non–U.S. government bonds
 
27,610

 
(285
)
 

 

 
27,610

 
(285
)
Corporate bonds
 
37,480

 
(1,497
)
 
134,043

 
(6,978
)
 
171,523

 
(8,475
)
 
 
214,185

 
(3,117
)
 
134,043

 
(6,978
)
 
348,228

 
(10,095
)
Other investments
 
1,710

 
(55
)
 

 

 
1,710

 
(55
)
Total temporarily impaired available-for-sale securities and other investments
 
$
215,895

 
$
(3,172
)
 
$
134,043

 
$
(6,978
)
 
$
349,938

 
$
(10,150
)

As of September 30, 2012, there were approximately 39 securities in an unrealized loss position with a fair value of $349,938 and unrealized losses of $10,150. 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 $134,043 and unrealized losses of $6,978.

 
 
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 of 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 September 30, 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 and nine months ended September 30, 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 September 30, 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 September 30, 2012.

The following summarizes the credit ratings of our fixed maturities:
 
Rating* as of September 30, 2012
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
U.S. treasury bonds
 
$
42,698

 
$
44,142

 
1.7
%
U.S. agency bonds  
 
1,055,728

 
1,097,249

 
42.0
%
AAA
 
171,235

 
179,352

 
6.9
%
AA+, AA, AA-
 
205,370

 
216,353

 
8.3
%
A+, A, A-
 
432,641

 
461,644

 
17.7
%
BBB+, BBB, BBB-
 
535,918

 
582,056

 
22.3
%
BB+ or lower
 
29,216

 
29,216

 
1.1
%
Total
 
$
2,472,806

 
$
2,610,012

 
100.0
%
 
Rating* as of 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")

(b) Other Investments

The table below shows our portfolio of other investments:
 
 
September 30, 2012
 
December 31, 2011
Investments in limited partnerships
 
$
2,826

 
100.0
%
 
$
2,192

 
100.0
%
Total other investments
 
$
2,826

 
100.0
%
 
$
2,192

 
100.0
%

The Company has an unfunded commitment on its investments in limited partnerships of approximately $3,174 as of September 30, 2012.

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)

(c) Realized and Unrealized Gains (Losses) 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 following provides an analysis of realized and unrealized gains (losses) on investment for the three and nine months ended September 30, 2012 and 2011:

For the Three Months Ended September 30, 2012
 
Gross gains
 
Gross losses
 
Net
Available-for-sale securities
 
$
2,374

 
$

 
$
2,374

Other investments
 
36

 

 
36

Net realized gains on investment
 
$
2,410

 
$

 
$
2,410


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 (losses) on investment
 
$
2,934

 
$
(5,834
)
 
$
(2,900
)

For the Nine Months Ended September 30, 2012
 
Gross gains
 
Gross losses
 
Net
Available-for-sale securities
 
$
2,374

 


 
$
2,374

Short sales
 

 
(1,593
)
 
(1,593
)
Other investments
 
56

 
(1
)
 
55

Net realized gains on investment
 
$
2,430

 
$
(1,594
)
 
$
836


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 (losses) on investment
 
$
4,018

 
$
(6,280
)
 
$
(2,262
)


Proceeds from sales of fixed maturities classified as available-for-sale were $120,865 and $106,041 for the nine months ended September 30, 2012 and 2011, respectively.



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)

Net unrealized gains on available-for-sale securities and other investments was as follows:
 
 
September 30, 2012
 
December 31, 2011
Available-for-sale securities
 
$
137,206

 
$
63,555

Other investments
 
296

 
237

Total net unrealized gains
 
137,502

 
63,792

Deferred income tax expense
 
(96
)
 
(55
)
Net unrealized gains, net of deferred income tax
 
$
137,406

 
$
63,737

Change in net unrealized gains, net of deferred income tax
 
$
73,669

 
$
8,983


(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, 2012
 
December 31, 2011
Restricted cash – third party agreements
 
$
91,418

 
$
67,627

Restricted cash – related party agreements
 
23,284

 
46,729

Restricted cash – U.S. state regulatory authorities
 
622

 
539

Total restricted cash
 
115,324

 
114,895

Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2012 – $1,040,038; 2011 – $950,103)
 
1,091,390

 
972,130

Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2012 – $796,778; 2011 – $458,105)
 
863,246

 
485,468

Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2012 – $12,747; 2011 – $12,862)
 
13,539

 
13,750

Total restricted investments
 
1,968,175

 
1,471,348

Total restricted cash and investments
 
$
2,083,499

 
$
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 September 30, 2012 was $0 (December 31, 2011 - $55,830).  This amount was included in accrued expenses and other liabilities in the condensed consolidated balance sheets.  Collateral of an equivalent amount was 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 bonds, 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 bonds ("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 September 30, 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 bonds: Other mortgage-backed bonds 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. 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. The fair value of the debt 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 September 30, 2012 and December 31, 2011:

September 30, 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
 
$
44,142

 
$

 
$

 
$
44,142

U.S. agency bonds – mortgage-backed
 

 
1,079,033

 

 
1,079,033

U.S. agency bonds – other
 

 
18,216

 

 
18,216

Non-U.S.government bonds
 

 
56,638

 

 
56,638

Other mortgage-backed bonds
 

 
23,979

 

 
23,979

Corporate bonds
 

 
1,261,525

 

 
1,261,525

Municipal bonds
 

 
126,479

 

 
126,479

Other investments
 

 

 
2,826

 
2,826

Total
 
$
44,142

 
$
2,565,870

 
$
2,826

 
$
2,612,838

As a percentage of total assets
 
1.1
%
 
65.0
%
 
0.1
%
 
66.2
%

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 bonds
 

 
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
%
 
58.1
%
 
0.1
%
 
59.6
%
Liabilities
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
 
$

 
$
55,830

 
$

 
$
55,830

As a percentage of total liabilities
 
%
 
2.1
%
 
%
 
2.1
%

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 and nine months ended September 30, 2012 and 2011:

 
 
For the Three Months Ended September 30,
Other investments:
 
2012

2011
Balance at beginning of period
 
$
2,697

 
$
1,962

Net realized gains – included in net income
 
36

 

Net realized losses – included in net income
 

 
(23
)
Change in net unrealized gains – included in other comprehensive income
 
7

 
19

Change in net unrealized losses – included in other comprehensive income
 

 

Purchases
 
200

 
192

Sales and redemptions
 
(114
)
 
(140
)
Transfers into Level 3
 

 

Transfers out of Level 3
 

 

Balance at end of period
 
$
2,826

 
$
2,010

Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
 
$

 
$



 
 
For the Nine Months Ended September 30,
Other investments:
 
2012
 
2011
Balance at beginning of period
 
$
2,192

 
$
5,847

Net realized gains – included in net income
 
55

 

Net realized losses – included in net income
 

 
(117
)
Change in net unrealized gains – included in other comprehensive income
 
59

 
102

Change in net unrealized losses – included in other comprehensive income
 

 

Purchases
 
794

 
1,026

Sales and redemptions
 
(274
)
 
(4,848
)
Transfers into Level 3
 

 

Transfers out of Level 3
 

 

Balance at end of period
 
$
2,826

 
$
2,010

Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
 
$

 
$










18

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)

(c) Fair Value of Liabilities

The following table presents the carrying values and fair values of the Senior Notes and Junior Subordinated debt as of September 30, 2012 and December 31, 2011:

 
 
 
September 30, 2012
 
December 31, 2011
 
Interest Rate
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2011 Senior Notes
8.25
%
 
$
107,500

 
$
114,337

 
$
107,500

 
$
104,888

2012 Senior Notes
8.00
%
 
100,000

 
106,800

 

 

Junior Subordinated Debt
14.00
%
 
126,303

 
165,864

 
126,263

 
173,621



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, 2012 and December 31, 2011:

September 30, 2012
 
Gross
 
Accumulated Amortization
 
Net
 
Useful Life
Goodwill
 
$
58,312

 
$

 
$
58,312

 
Indefinite
State licenses
 
7,727

 

 
7,727

 
Indefinite
Customer relationships
 
51,400

 
(21,955
)
 
29,445

 
15 years double declining
Net balance
 
$
117,439

 
$
(21,955
)
 
$
95,484

 
 

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

 
 







19

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


5. Goodwill and Intangible Assets (continued)

The goodwill and intangible assets were recognized as a result of the acquisitions and are subject to annual impairment testing. No impairment was recorded during the three and nine months ended September 30, 2012 and 2011. The estimated amortization expenses for the next five years are:
2012
$
1,091

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 and nine months ended September 30, 2012 were $2,217 and $6,651, respectively (September 30, 2011 - $2,217 and $2,390, respectively), out of which $394 was accrued as of September 30, 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, 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 and nine months ended September 30, 2012 were $2,000 and $4,111, respectively, out of which $111 was accrued as of September 30, 2012.

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.



20

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)

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, repurchase 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; however, the Company is not deemed 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, including $79,066 of the Units originally purchased by certain trusts established by Michael Karfunkel.  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 September 30, 2012, the stated value of the Junior Subordinated Debt was $126,303 which comprises the principal amount of $152,500 and unamortized discount of $26,197. Amortization expense for the three and nine months ended September 30, 2012 were $14 and $40, respectively (September 30, 2011 - $4 and $33, respectively).  Interest expense for the three and nine months ended September 30, 2012 were $5,338 and $16,013, respectively (September 30, 2011 - $5,965 and $24,165, respectively), out of which $4,448 was accrued as of September 30, 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 September 30,
 
For the Nine Months Ended September 30,
 
2012

2011
 
2012
 
2011
Net income attributable to Maiden common shareholders
$
21,919

 
$
16,004

 
$
56,837

 
$
10,980

Weighted average number of common shares outstanding – basic
72,270,052

 
72,182,759

 
72,251,711

 
72,136,366

Potentially dilutive securities:
 
 
 
 
 
 
 
Share options and restricted share units
868,909

 
739,209

 
836,822

 
746,968

Weighted average number of common shares outstanding – diluted
73,138,961

 
72,921,968

 
73,088,533

 
72,883,334

Basic earnings per share attributable to Maiden common shareholders:
$
0.30

 
$
0.22

 
$
0.79

 
$
0.15

Diluted earnings per share attributable to Maiden common shareholders:
$
0.30

 
$
0.22

 
$
0.78

 
$
0.15


As of September 30, 2012, 2,082,608 share options (September 30, 2011 - 2,147,674) were excluded from the calculation of diluted earnings per common share as they were anti-dilutive.





21

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

8. Shareholders' Equity

Preference Shares - Series A

On August 22, 2012, the Company issued six million 8.25% Preference Shares - Series A (the “Preference Shares”), par value $0.01 per share, at a price of $25 per share. The Company received net proceeds of $145,041 from its offering, after deducting expenses and underwriting discounts of $4,959. The Preference Shares have no stated maturity date and are redeemable in whole or in part at the option of the Company any time after August 29, 2017 at a redemption price of $25 per preference share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.

Dividends on the Preference Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preference Shares for any dividend period, holders of Preference Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. The holders of Preference Shares will be entitled to receive dividend payments only when, as and if declared by the Company's Board of Directors or a duly authorized committee of the Board of Directors. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.25% of the $25 liquidation preference per annum. During any dividend period, so long as any Preference Shares remain outstanding, unless the full dividends for the latest completed dividend period on all outstanding Preference Shares have been declared and paid, no dividend shall be paid or declared on the common shares.

The holders of the Preference Shares have no voting rights other than the right to elect up to two of directors if preference share dividends are not declared and paid for six or more dividend periods.

During the three and nine months ended September 30, 2012, the Company declared and paid $0 in preference share dividends.

9. Share Based Compensation

The Company’s 2007 Share Incentive Plan, as amended (the "Plan") provides for grants of share 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.

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 $343 and $995 for the three and nine months ended September 30, 2012, respectively (September 30, 2011 - $333 and $1,011, respectively).

Share Options

The key assumptions used in determining the fair value of options granted in the three and nine months ended September 30, 2012 and a summary of the methodology applied to develop each assumption are as follows:

 
September 30, 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

22

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

9. Share Based Compensation (continued)

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.

The following schedule shows all options granted, exercised, expired and forfeited under the Plan for the three and nine months ended September 30, 2012 and 2011.

For the Three Months Ended September 30, 2012
Number of
Share
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
Outstanding, June 30, 2012
2,870,581

 
$
6.62

 
7.13 years
Exercised
(20,907
)
 
$
4.36

 

Expired
(52,251
)
 
$
9.90

 

Forfeited
(7,465
)
 
$
7.76

 

Outstanding, September 30, 2012
2,789,958

 
$
6.58

 
6.90 years
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

 

Expired
(1,750
)
 
$
7.66

 

Outstanding, September 30, 2011
2,835,141

 
$
6.54

 
7.72 years

For the Nine Months Ended September 30, 2012
Number of
Share
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
Outstanding, December 31, 2011