Q1 2013 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, 2013

¬
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 8, 2013, the number of the Registrant's Common Stock ($.01 par value) outstanding was 72,440,861.






INDEX
 
 
Page
PART I - Financial Information
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - Other Information
 
 
 
 
Item 1.
 
 
 
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, 2013 (Unaudited)
 
December 31, 2012
 (Audited)
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (Amortized cost 2013: $2,497,242; 2012: $2,475,202)
$
2,629,873


$
2,618,697

Other investments, at fair value (Cost 2013: $2,987; 2012: $2,599)
3,220


2,901

Total investments
2,633,093


2,621,598

Cash and cash equivalents
103,789


81,543

Restricted cash and cash equivalents
127,316


132,327

Accrued investment income
21,180


21,007

Reinsurance balances receivable, net (includes $387,591 and $265,766 from related parties in 2013 and 2012, respectively)
726,392


522,614

Funds withheld
44,281


42,712

Prepaid reinsurance premiums (includes $573 and $743 from related parties in 2013 and 2012, respectively)
38,786


38,725

Reinsurance recoverable on unpaid losses (includes $9,429 and $9,387 from related parties in 2013 and 2012, respectively)
118,091


110,858

Loan to related party
167,975


167,975

Deferred commission and other acquisition expenses (includes $222,374 and $187,387 from related parties in 2013 and 2012, respectively)
312,254


270,669

Goodwill and intangible assets, net
93,448


94,393

Other assets
30,646


33,742

Total assets
$
4,417,251

 
$
4,138,163

LIABILITIES
 
 
 
Reserve for loss and loss adjustment expenses (includes $649,006 and $610,810 from related parties in 2013 and 2012, respectively)
$
1,779,050


$
1,740,281

Unearned premiums (includes $740,517 and $612,903 from related parties in 2013 and 2012, respectively)
1,134,697


936,497

Accrued expenses and other liabilities
142,977


111,957

Senior notes
207,500


207,500

Junior subordinated debt
126,332


126,317

Total liabilities
3,390,556

 
3,122,552

Commitments and Contingencies


 


EQUITY
 
 
 
Preference shares - Series A
$
150,000


$
150,000

Common shares ($0.01 par value; 73,403,193 and 73,306,283 shares issued in 2013 and 2012, respectively; 72,440,857 and 72,343,947 shares outstanding in 2013 and 2012, respectively)
734


733

Additional paid-in capital
576,517


575,869

Accumulated other comprehensive income
133,098


141,130

Retained earnings
169,774


151,308

Treasury shares, at cost (2013 and 2012: 962,336 shares)
(3,801
)

(3,801
)
Total Maiden shareholders’ equity
1,026,322

 
1,015,239

Noncontrolling interest in subsidiaries
373


372

Total equity
1,026,695

 
1,015,611

Total liabilities and equity
$
4,417,251

 
$
4,138,163

See accompanying notes to the unaudited condensed consolidated financial statements.

3


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


For the Three Months Ended March 31,
2013

2012
Revenues:
 
 
 
Gross premiums written
$
714,720


$
613,212

Net premiums written
$
689,059


$
590,833

Change in unearned premiums
(200,617
)

(152,337
)
Net premiums earned
488,442

 
438,496

Other insurance revenue
5,215


4,754

Net investment income
21,979


18,437

Net realized and unrealized gains on investment
3,283


1,365

Total revenues
518,919

 
463,052

Expenses:
 
 
 
Net loss and loss adjustment expenses
334,895


287,917

Commission and other acquisition expenses
132,330


132,258

General and administrative expenses
14,095


13,831

Interest and amortization expenses
9,570


7,678

Amortization of intangible assets
945


1,090

Foreign exchange gains
(1,547
)

(979
)
Total expenses
490,288

 
441,795

Income before income taxes
28,631

 
21,257

Income taxes:
 
 
 
Current tax expense
573


638

Deferred tax (benefit) expense
(49
)

241

Income tax expense
524

 
879

Net income
28,107

 
20,378

Less: Income attributable to noncontrolling interest
(27
)

(1
)
Net income attributable to Maiden shareholders
28,080

 
20,377

Dividends on preference shares
(3,094
)
 

Net income attributable to Maiden common shareholders
$
24,986

 
$
20,377

Basic earnings per share attributable to Maiden common shareholders
$
0.35


$
0.28

Diluted earnings per share attributable to Maiden common shareholders
$
0.34


$
0.28

Dividends declared per common share
$
0.09

 
$
0.08


See accompanying notes to the unaudited condensed consolidated financial statements.
 

4




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


 
 
For the Three Months Ended March 31,
2013

2012
Comprehensive income:
 
 
 
Net income
$
28,107

 
$
20,378

Other comprehensive income
 
 
 
Net unrealized holding (losses) gains on available-for-sale fixed maturities arising during the period (net of tax of $7 and ($3) in 2013 and 2012, respectively)
(7,848
)
 
29,309

Adjustment for reclassification of net realized gains recognized in net income, net of tax
(3,081
)
 
(10
)
Foreign currency translation adjustment
2,886

 
(2,501
)
Other comprehensive income
(8,043
)
 
26,798

Comprehensive income
20,064

 
47,176

Net income attributable to noncontrolling interest
(27
)
 
(1
)
Other comprehensive loss (income) attributable to noncontrolling interest
11

 
(8
)
Comprehensive income attributable to noncontrolling interest
(16
)
 
(9
)
Comprehensive income attributable to Maiden shareholders
$
20,048

 
$
47,167



See accompanying notes to the unaudited condensed consolidated financial statements.


5



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

For the Three Months Ended March 31,

2013

2012
Preference shares - Series A
 
 
 
 
Beginning balance
 
$
150,000

 
$

Ending balance
 
150,000

 

Common shares
 
 
 
 
Beginning balance
 
733

 
732

Exercise of options and issuance of shares
 
1

 

Ending balance
 
734

 
732

Additional paid-in capital
 
 
 
 
Beginning balance
 
575,869

 
579,004

Exercise of options and issuance of common shares
 
339

 
124

Share based compensation expense
 
309

 
285

Ending balance
 
576,517

 
579,413

Accumulated other comprehensive income
 
 
 
 
Beginning balance
 
141,130

 
64,059

Change in net unrealized (losses) gains on investments, net
 
(10,929
)
 
29,299

Foreign currency translation adjustments
 
2,897

 
(2,509
)
Ending balance
 
133,098

 
90,849

Retained earnings
 
 
 
 
Beginning balance
 
151,308

 
128,648

Net income attributable to Maiden common shareholders
 
28,080

 
20,377

Dividends on preference shares
 
(3,094
)
 

Dividends on common shares
 
(6,520
)
 
(5,780
)
Ending balance
 
169,774

 
143,245

Treasury shares
 
 
 
 
Beginning balance
 
(3,801
)
 
(3,801
)
Ending balance
 
(3,801
)
 
(3,801
)
Noncontrolling interest in subsidiaries
 
 
 
 
Beginning balance
 
372

 
338

Dividend paid to noncontrolling interest
 
(15
)
 

Net income attributable to noncontrolling interest
 
27

 
1

Foreign currency translation adjustments
 
(11
)
 
8

Ending balance
 
373

 
347

Total equity
 
$
1,026,695

 
$
810,785


See accompanying notes to the unaudited condensed consolidated financial statements.


6


MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of U.S. dollars)
For the Three Months Ended March 31,
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
28,107

 
$
20,378

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
1,312

 
1,618

Net realized and unrealized gains on investment
(3,283
)
 
(1,365
)
Foreign exchange gains
(1,547
)
 
(979
)
Amortization of share-based compensation expense, bond premium and discount and subordinated debt discount, net
3,066

 
1,425

Changes in assets – (increase) decrease:
 
 
 
Reinsurance balances receivable, net
(210,319
)
 
(128,717
)
Funds withheld
(2,610
)
 
(814
)
Prepaid reinsurance premiums
(61
)
 
(505
)
Reinsurance recoverable on unpaid losses
(7,235
)
 
(5,612
)
Accrued investment income
(219
)
 
(1,665
)
Deferred commission and other acquisition expenses
(41,915
)
 
(28,831
)
Other assets
4,947

 
2,804

Changes in liabilities – increase (decrease):
 
 


Reserve for loss and loss adjustment expenses
48,328

 
57,337

Unearned premiums
200,678

 
160,786

Accrued expenses and other liabilities
(3,051
)
 
(4,635
)
Net cash provided by operating activities
16,198

 
71,225

Cash flows from investing activities:
 
 
 
Purchases of fixed maturities – available-for-sale
(178,122
)
 
(400,835
)
Purchases of other investments
(290
)
 
(308
)
Proceeds from sales of fixed maturities – available-for-sale
45,379

 
104,125

Proceeds from maturities and calls of fixed maturities
138,654

 
103,319

Proceeds from redemption of other investments
73

 
92

Decrease in restricted cash and cash equivalents
5,011

 
24,916

Purchase of capital assets
(99
)
 
(74
)
Net cash provided by (used in) investing activities
10,606

 
(168,765
)
Cash flows from financing activities:
 
 
 
Senior notes issuance, net of issuance costs

 
96,850

Common share issuance
340

 
124

Dividends paid to common shareholders

 
(5,778
)
Dividends paid to preference shareholders
(3,094
)
 

Net cash (used in) provided by financing activities
(2,754
)
 
91,196

Effect of exchange rate changes on foreign currency cash
(1,804
)
 
2,108

Net increase (decrease) in cash and cash equivalents
22,246

 
(4,236
)
Cash and cash equivalents, beginning of period
81,543

 
188,082

Cash and cash equivalents, end of period
$
103,789

 
$
183,846


See accompanying notes to the unaudited condensed consolidated financial statements.

7

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





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 unaudited 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, 2012.

Certain reclassifications have been made for 2012 to conform to the 2013 presentation and have no impact on net income previously reported.

2. Recent Accounting Pronouncements

Recently Adopted Accounting Standards Updates

Comprehensive Income - Reporting of amounts reclassified out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The ASU expands the current disclosure guidance by requiring entities to present separately, for each component of other comprehensive income, current period reclassifications out of accumulated other comprehensive income and other amounts of current period other comprehensive income. In addition, the ASU requires entities to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of other comprehensive income by component of accumulated other comprehensive income. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption of the guidance is permitted and shall be applied prospectively. The adoption of this guidance did not 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 is 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 did not have any effect on the Company's results of operations, financial position or liquidity.

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 the 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 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 did not have any effect on the Company's results of operations, financial position or liquidity.



8

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



2. Recent Accounting Pronouncements (continued)

Technical Corrections and Improvements

In October 2012, FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this ASU represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments will make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. Transition guidance is provided for amendments the FASB believes could change practice. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.
Recently Issued Accounting Standards Updates Not Yet Adopted

Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

In March 2013, FASB issued ASU 2013-05 with the objective of resolving the diversity about whether Accounting Standards Codification ("ASC") 810-10, Consolidation-Overall, or ASC 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity.

Under this guidance, when a reporting entity that is also the parent entity, ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Additionally, for an equity method investment that is a foreign entity, the partial sale guidance in ASC 830-30-40 continues to be applicable. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

Furthermore, the amendments in this ASU clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity (that is, irrespective of any retained investment) and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events.

The amendments in this ASU are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on our results of operations, financial condition or liquidity.

3. 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 cash equivalents and investments. All remaining assets are allocated to Corporate.

The fee-generating business (“IIS Fee Business”) associated with the acquisition of certain companies, businesses and assets comprising the international insurance services business of GMAC Insurance Holdings Ltd. (the “IIS Acquisition”), 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.


9

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



3. Segments (continued)

To the extent that the fees are generated on underlying insurance contracts sold to third parties that are then ceded under the quota share reinsurance contracts with Maiden Insurance Company Ltd. ("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 unaudited Condensed Consolidated Statements of Income.

The following tables summarize the underwriting results of our operating segments:
For the Three Months Ended March 31, 2013

Diversified Reinsurance

AmTrust Quota Share Reinsurance

ACAC
Quota Share

Total
Net premiums written

$
267,610


$
344,818


$
76,631


$
689,059

Net premiums earned

$
196,249


$
220,288


$
71,905


$
488,442

Other insurance revenue

5,215






5,215

Net loss and loss adjustment expenses

(140,763
)

(145,645
)

(48,487
)

(334,895
)
Commission and other acquisition expenses

(44,782
)

(65,132
)

(22,416
)

(132,330
)
General and administrative expenses

(10,798
)

(489
)

(174
)

(11,461
)
Underwriting income

$
5,121


$
9,022


$
828


14,971

Reconciliation to net income attributable to Maiden common shareholders












Net investment income and realized gains on investment










25,262

Amortization of intangible assets










(945
)
Foreign exchange gains










1,547

Interest and amortization expenses










(9,570
)
Other general and administrative expenses










(2,634
)
Income tax expense










(524
)
Income attributable to noncontrolling interest










(27
)
Dividends on preference shares
 
 
 
 
 
 
 
(3,094
)
Net income attributable to Maiden common shareholders










$
24,986














Net loss and loss adjustment expense ratio*

69.9
%

66.1
%

67.4
%

67.8
%
Commission and other acquisition expense ratio**

22.2
%

29.6
%

31.2
%

26.8
%
General and administrative expense ratio***

5.4
%

0.2
%

0.2
%

2.9
%
Combined ratio****

97.5
%

95.9
%

98.8
%

97.5
%


10

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



3. Segments (continued)
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 common 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 common shareholders
 
 
 
 
 
 
 
$
20,377

 
 
 
 
 
 
 
 
 
Net loss and loss adjustment expense ratio*
 
63.3
%
 
67.2
%
 
64.5
%
 
65.0
%
Commission and other acquisition expense 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
%

*
Calculated by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue.

**
Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue.

***
Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue.

****
Calculated by adding together net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio.

11

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



3. Segments (continued)
March 31, 2013
Diversified
Reinsurance
 
AmTrust
Quota Share Reinsurance
 
ACAC
Quota Share
 
Total
Reinsurance balances receivable, net
$
342,874

 
$
289,269

 
$
94,249

 
$
726,392

Funds withheld
44,281

 

 

 
44,281

Prepaid reinsurance premiums
38,786

 

 

 
38,786

Reinsurance recoverable on unpaid losses
118,091

 

 

 
118,091

Deferred commission and other acquisition expenses
89,914

 
187,048

 
35,292

 
312,254

Loan to related party

 
167,975

 

 
167,975

Goodwill and intangible assets, net
93,448

 

 

 
93,448

Restricted cash and cash equivalents and investments
1,118,090

 
867,797

 
96,176

 
2,082,063

Corporate and other assets
13,301

 

 

 
833,961

Total Assets
$
1,858,785

 
$
1,512,089

 
$
225,717

 
$
4,417,251


December 31, 2012
Diversified
Reinsurance
 
AmTrust
Quota Share Reinsurance
 
ACAC
Quota Share
 
Total
Reinsurance balances receivable, net
$
260,161

 
$
170,983

 
$
91,470

 
$
522,614

Funds withheld
42,712

 

 

 
42,712

Prepaid reinsurance premiums
38,725

 

 

 
38,725

Reinsurance recoverable on unpaid losses
110,858

 

 

 
110,858

Deferred commission and other acquisition expenses
83,287

 
153,530

 
33,852

 
270,669

Loan to related party

 
167,975

 

 
167,975

Goodwill and intangible assets, net
94,393

 

 

 
94,393

Restricted cash and cash equivalents and investments
1,219,454

 
857,013

 
90,851

 
2,167,318

Corporate and other assets
5,864

 

 

 
722,899

Total Assets
$
1,855,454

 
$
1,349,501

 
$
216,173

 
$
4,138,163


12

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



3. Segments (continued)

The following tables set forth financial information relating to net premiums written and earned by major line of business for the three months ended March 31, 2013 and 2012:
 
For the Three Months Ended March 31,
 
2013

2012
Net premiums written
Total
 
% of Total
 
Total
 
% of Total
Diversified Reinsurance
 
 
 
 
 
 
 
Property
$
69,522

 
10.1
%
 
$
80,106

 
13.6
%
Casualty
148,423

 
21.5
%
 
151,939

 
25.7
%
Accident and Health
15,529

 
2.2
%
 
19,472

 
3.3
%
International
34,136

 
5.0
%
 
36,779

 
6.2
%
Total Diversified Reinsurance
267,610

 
38.8
%
 
288,296

 
48.8
%
AmTrust Quota Share Reinsurance
 
 
 
 
 
 
 
Small Commercial Business
162,018

 
23.5
%
 
90,292

 
15.3
%
Specialty Program
34,946

 
5.1
%
 
22,188

 
3.8
%
Specialty Risk and Extended Warranty
147,854

 
21.5
%
 
113,535

 
19.2
%
Total AmTrust Quota Share Reinsurance
344,818

 
50.1
%
 
226,015

 
38.3
%
ACAC Quota Share
 
 
 
 
 
 
 
Automobile Liability
44,339

 
6.4
%
 
43,868

 
7.4
%
Automobile Physical Damage
32,292

 
4.7
%
 
32,654

 
5.5
%
Total ACAC Quota Share
76,631

 
11.1
%
 
76,522

 
12.9
%
 
$
689,059

 
100.0
%
 
$
590,833

 
100.0
%
 
For the Three Months Ended March 31,
 
2013
 
2012
Net premiums earned
Total
 
% of Total
 
Total
 
% of Total
Diversified Reinsurance
 
 
 
 
 
 
 
Property
$
47,547

 
9.7
%
 
$
58,148

 
13.3
%
Casualty
117,059

 
24.0
%
 
103,979

 
23.7
%
Accident and Health
8,633

 
1.8
%
 
10,644

 
2.4
%
International
23,010

 
4.7
%
 
31,692

 
7.2
%
Total Diversified Reinsurance
196,249

 
40.2
%
 
204,463

 
46.6
%
AmTrust Quota Share Reinsurance
 
 
 
 
 
 
 
Small Commercial Business
102,257

 
20.9
%
 
66,892

 
15.3
%
Specialty Program
33,346

 
6.8
%
 
27,638

 
6.3
%
Specialty Risk and Extended Warranty
84,685

 
17.3
%
 
73,349

 
16.7
%
Total AmTrust Quota Share Reinsurance
220,288

 
45.0
%
 
167,879

 
38.3
%
ACAC Quota Share
 
 
 
 
 
 
 
Automobile Liability
41,630

 
8.6
%
 
38,137

 
8.7
%
Automobile Physical Damage
30,275

 
6.2
%
 
28,017

 
6.4
%
Total ACAC Quota Share
71,905

 
14.8
%
 
66,154

 
15.1
%
 
$
488,442

 
100.0
%
 
$
438,496

 
100.0
%
    


13

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



4.   Investments

(a) Fixed Maturities and Other Investments

The original or amortized cost, estimated fair value and gross unrealized gains and losses of available-for-sale fixed maturities and other investments as of March 31, 2013 and December 31, 2012 are as follows:
March 31, 2013
 
Original or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
42,644

 
$
1,084

 
$

 
$
43,728

U.S. agency bonds – mortgage-backed
 
972,653

 
27,720

 
(1,370
)
 
999,003

U.S. agency bonds – other
 
11,682

 
1,293

 

 
12,975

Non-U.S. government bonds
 
54,325

 
1,365

 
(415
)
 
55,275

Other mortgage-backed bonds
 
22,837

 
664

 

 
23,501

Corporate bonds
 
1,259,474

 
105,417

 
(4,472
)
 
1,360,419

Municipal bonds
 
133,627

 
1,345

 

 
134,972

Total available-for-sale fixed maturities
 
2,497,242

 
138,888

 
(6,257
)
 
2,629,873

Other investments
 
2,987

 
319

 
(86
)
 
3,220

Total investments
 
$
2,500,229

 
$
139,207

 
$
(6,343
)
 
$
2,633,093


December 31, 2012
 
Original or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
42,671

 
$
1,260

 
$

 
$
43,931

U.S. agency bonds – mortgage-backed
 
962,649

 
30,998

 
(1,473
)
 
992,174

U.S. agency bonds – other
 
11,682

 
1,407

 

 
13,089

Non-U.S. government bonds
 
55,169

 
2,264

 

 
57,433

Other mortgage-backed bonds
 
23,167

 
901

 

 
24,068

Corporate bonds
 
1,247,260

 
113,386

 
(6,492
)
 
1,354,154

Municipal bonds
 
132,604

 
1,244

 

 
133,848

Total available-for-sale fixed maturities
 
2,475,202

 
151,460

 
(7,965
)
 
2,618,697

Other investments
 
2,599

 
353

 
(51
)
 
2,901

Total investments
 
$
2,477,801

 
$
151,813

 
$
(8,016
)
 
$
2,621,598



14

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



4.   Investments (continued)

The contractual maturities of our fixed maturities, available-for-sale as of March 31, 2013 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.
March 31, 2013
 
Amortized cost
 
Fair
value
 
% of Total fair value
Maturity
 
 
 
 
 
 
Due in one year or less
 
$
97,965

 
$
99,560

 
3.8
%
Due after one year through five years
 
369,251

 
388,212

 
14.8
%
Due after five years through ten years
 
870,904

 
953,033

 
36.2
%
Due after ten years
 
163,632

 
166,564

 
6.3
%
 
 
1,501,752

 
1,607,369

 
61.1
%
U.S. agency bonds – mortgage-backed
 
972,653

 
999,003

 
38.0
%
Other mortgage-backed bonds
 
22,837

 
23,501

 
0.9
%
Total
 
$
2,497,242

 
$
2,629,873

 
100.0
%

The following tables summarize our available-for-sale fixed maturities 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, 2013
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
181,598

 
$
(1,042
)
 
$
11,633

 
$
(328
)
 
$
193,231

 
$
(1,370
)
Non–U.S. government bonds
 
27,956

 
(415
)
 

 

 
27,956

 
(415
)
Corporate bonds
 
100,881

 
(1,372
)
 
144,214

 
(3,100
)
 
245,095

 
(4,472
)
 
 
310,435

 
(2,829
)
 
155,847

 
(3,428
)
 
466,282

 
(6,257
)
Other investments
 

 

 
2,278

 
(86
)
 
2,278

 
(86
)
Total temporarily impaired available-for-sale fixed maturities and other investments
 
$
310,435

 
$
(2,829
)
 
$
158,125

 
$
(3,514
)
 
$
468,560

 
$
(6,343
)

As of March 31, 2013, there were approximately 53 securities in an unrealized loss position with a fair value of $468,560 and unrealized losses of $6,343. Of these securities, there are 10 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $158,125 and unrealized losses of $3,514.

 
 
Less than 12 Months
 
12 Months or more
 
Total
December 31, 2012
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
158,591

 
$
(1,473
)
 
$

 
$

 
$
158,591

 
$
(1,473
)
Corporate bonds
 
94,742

 
(1,098
)
 
141,842

 
(5,394
)
 
236,584

 
(6,492
)
 
 
253,333

 
(2,571
)
 
141,842

 
(5,394
)
 
395,175

 
(7,965
)
Other investments
 

 

 
2,011

 
(51
)
 
2,011

 
(51
)
Total temporarily impaired available-for-sale fixed maturities and other investments
 
$
253,333

 
$
(2,571
)
 
$
143,853

 
$
(5,445
)
 
$
397,186

 
$
(8,016
)



15

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



4.   Investments (continued)

As of December 31, 2012, there were approximately 32 securities in an unrealized loss position with a fair value of $397,186 and unrealized losses of $8,016. Of these securities, there are 9 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $143,853 and unrealized losses of $5,445.

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, 2013, 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, 2013 and 2012, the Company recognized no OTTI. Based on our qualitative and quantitative OTTI review of each asset class within our fixed maturity portfolio, the unrealized losses on fixed maturities at March 31, 2013 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, 2013.

The following summarizes the credit ratings of our fixed maturities:
Rating* as of March 31, 2013
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
U.S. treasury bonds
 
$
42,644

 
$
43,728

 
1.7
%
U.S. agency bonds  
 
984,335

 
1,011,978

 
38.5
%
AAA
 
170,398

 
180,366

 
6.9
%
AA+, AA, AA-
 
175,773

 
184,189

 
7.0
%
A+, A, A-
 
466,591

 
503,336

 
19.1
%
BBB+, BBB, BBB-
 
619,006

 
665,452

 
25.3
%
BB+ or lower
 
38,495

 
40,824

 
1.5
%
Total
 
$
2,497,242

 
$
2,629,873

 
100.0
%
 
Rating* as of December 31, 2012
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
U.S. treasury bonds
 
$
42,671

 
$
43,931

 
1.7
%
U.S. agency bonds
 
974,331

 
1,005,263

 
38.4
%
AAA
 
171,136

 
183,950

 
7.0
%
AA+, AA, AA-
 
186,495

 
196,797

 
7.5
%
A+, A, A-
 
477,236

 
515,383

 
19.7
%
BBB+, BBB, BBB-
 
587,858

 
637,089

 
24.3
%
BB+ or lower
 
35,475

 
36,284

 
1.4
%
Total
 
$
2,475,202

 
$
2,618,697

 
100.0
%

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


16

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



4.   Investments (continued)

(b) Other Investments

The table below shows our portfolio of other investments:
 
 
March 31, 2013
 
December 31, 2012
Investments in limited partnerships
 
$
3,220

 
100.0
%
 
$
2,901

 
100.0
%
Total other investments
 
$
3,220

 
100.0
%
 
$
2,901

 
100.0
%

The Company has an unfunded commitment on its investments in limited partnerships of approximately $2,780 as of March 31, 2013.

(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. The following provides an analysis of realized and unrealized gains (losses) on investment for the three months ended March 31, 2013 and 2012:
For the Three Months Ended March 31, 2013
 
Gross gains
 
Gross losses
 
Net
Available-for-sale fixed maturities
 
$
3,112

 
$

 
$
3,112

Other investments
 
171

 

 
171

Net realized gains on investment
 
$
3,283

 
$

 
$
3,283

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


Proceeds from sales of fixed maturities classified as available-for-sale were $45,379 and $104,125 for the three months ended March 31, 2013 and 2012, respectively.

Net unrealized gains on available-for-sale fixed maturities and other investments was as follows:
 
 
March 31, 2013
 
December 31, 2012
Available-for-sale fixed maturities
 
$
132,631

 
$
143,495

Other investments
 
233

 
302

Total net unrealized gains
 
132,864

 
143,797

Deferred income tax expense
 
(128
)
 
(132
)
Net unrealized gains, net of deferred income tax
 
$
132,736

 
$
143,665

Change in net unrealized gains, net of deferred income tax
 
$
(10,929
)
 
$
79,928



17

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



4.   Investments (continued)

(d) Restricted Cash and Cash Equivalents 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, 2013

December 31, 2012
Restricted cash and cash equivalents – third party agreements
 
$
86,715

 
$
97,695

Restricted cash and cash equivalents – related party agreements
 
39,884

 
33,882

Restricted cash and cash equivalents  – U.S. state regulatory authorities
 
717

 
750

Total restricted cash and cash equivalents
 
127,316

 
132,327

Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2013 – $961,998; 2012 – $1,048,827)
 
1,011,229

 
1,101,971

Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2013 – $864,012; 2012 – $851,873)
 
930,123

 
919,557

Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2013 – $12,740; 2012 – $12,744)
 
13,395

 
13,463

Total restricted investments
 
1,954,747

 
2,034,991

Total restricted cash and cash equivalents and investments
 
$
2,082,063

 
$
2,167,318


5. Fair Value of Financial Instruments

(a) Fair Values of Financial Instruments

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs 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.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. We use prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels.

18

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



5. Fair Value of Financial Instruments (continued)

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in the Level 1 hierarchy. The Company receives the quoted market prices from third party, nationally, recognized pricing services (“pricing service”). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate. The fair value estimates are included in the Level 2 hierarchy. The Company will challenge any prices for its investments which are considered to not represent fair value. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is Level 2 or Level 3 hierarchy. The Company bases its estimates of fair values for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s length transaction.

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, 2013.

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. Treasury 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. 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. 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 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.

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 Condensed Consolidated Balance Sheets 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.

19

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



5. Fair Value of Financial Instruments (continued)

Loan to related party —  The carrying value reported in the accompanying balance sheets for this financial instrument approximates its 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 value of the loan to related party is 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 this financial instrument 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.

(b) Fair Value Hierarchy

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

At March 31, 2013 and December 31, 2012, we classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
March 31, 2013
 
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
 
$
43,728

 
$

 
$

 
$
43,728

U.S. agency bonds – mortgage-backed
 

 
999,003

 

 
999,003

U.S. agency bonds – other
 

 
12,975

 

 
12,975

Non-U.S. government bonds
 

 
55,275

 

 
55,275

Other mortgage-backed bonds
 

 
23,501

 

 
23,501

Corporate bonds
 

 
1,360,419

 

 
1,360,419

Municipal bonds
 

 
134,972

 

 
134,972

Other investments
 

 

 
3,220

 
3,220

Total
 
$
43,728

 
$
2,586,145

 
$
3,220

 
$
2,633,093

As a percentage of total assets
 
1.0
%
 
58.5
%
 
0.1
%
 
59.6
%

20

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



5. Fair Value of Financial Instruments (continued)

December 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
 
$
43,931

 
$

 
$

 
$
43,931

U.S. agency bonds – mortgage-backed
 

 
992,174

 

 
992,174

U.S. agency bonds – other
 

 
13,089

 

 
13,089

Non-U.S. government bonds
 

 
57,433

 

 
57,433

Other mortgage-backed bonds
 

 
24,068

 

 
24,068

Corporate bonds
 

 
1,354,154

 

 
1,354,154

Municipal bonds
 

 
133,848

 

 
133,848

Other investments
 

 

 
2,901

 
2,901

Total
 
$
43,931

 
$
2,574,766

 
$
2,901

 
$
2,621,598

As a percentage of total assets
 
1.1
%
 
62.2
%
 
0.1
%
 
63.4
%

The Company utilized a pricing service to estimate fair value measurements for approximately 99.0% of its fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classified as level 2.

Other investments:  The Company has $3,220 or approximately 0.1% of its investment portfolio in limited partnerships where the fair value estimate is determined by the fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the estimate in the amount disclosed as Level 3. The Company has determined that its investments in Level 3 securities are not material to its financial position or results of operations.

(c) 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, 2013 and 2012:
Other investments:
 
2013

2012
Balance at beginning of period
 
$
2,901

 
$
2,192

Net realized gains – included in net income
 
171

 
10

Net realized losses – included in net income
 

 

Change in net unrealized gains – included in other comprehensive income
 

 
12

Change in net unrealized losses – included in other comprehensive income
 
(69
)
 

Purchases
 
290

 
308

Sales and redemptions
 
(73
)
 
(92
)
Transfers into Level 3
 

 

Transfers out of Level 3
 

 

Balance at end of period
 
$
3,220

 
$
2,430

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

 
$



21

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



5. Fair Value of Financial Instruments (continued)

(d) Fair Value of Liabilities

The following table presents the carrying values and fair values of the Senior Notes and Junior Subordinated debt as of March 31, 2013 and December 31, 2012:
 
 
 
March 31, 2013
 
December 31, 2012
 
Interest Rate
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2011 Senior Notes
8.25
%
 
$
107,500

 
$
115,455

 
$
107,500