Q1 2014 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, 2014

¬
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 6, 2014, the number of the Registrant's Common Stock ($.01 par value) outstanding was 72,854,240.






INDEX
 
 
Page
PART I - Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II - Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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, 2014 (Unaudited)
 
December 31, 2013
 (Audited)
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (Amortized cost 2014: $3,096,675; 2013: $3,127,792)
$
3,168,819


$
3,162,067

Other investments, at fair value (Cost 2014: $5,083; 2013: $4,522)
5,773


5,092

Total investments
3,174,592


3,167,159

Cash and cash equivalents
72,038


139,833

Restricted cash and cash equivalents
151,212


77,360

Accrued investment income
25,268


25,238

Reinsurance balances receivable, net (includes $339,084 and $299,645 from related parties in 2014 and 2013, respectively)
675,219


560,145

Prepaid reinsurance premiums
31,870


39,186

Reinsurance recoverable on unpaid losses (includes $6,062 and $7,263 from related parties in 2014 and 2013, respectively)
83,350


84,036

Loan to related party
167,975


167,975

Deferred commission and other acquisition expenses (includes $246,397 and $216,508 from related parties in 2014 and 2013, respectively)
348,716


304,908

Goodwill and intangible assets, net
89,794


90,613

Other assets
48,522


56,926

Total assets
$
4,868,556

 
$
4,713,379

LIABILITIES
 
 
 
Reserve for loss and loss adjustment expenses (includes $948,438 and $885,381 from related parties in 2014 and 2013, respectively)
$
2,035,840


$
1,957,835

Unearned premiums (includes $809,209 and $711,950 from related parties in 2014 and 2013, respectively)
1,218,519


1,034,754

Accrued expenses and other liabilities
103,565


110,114

Senior notes
360,000


360,000

Junior subordinated debt


126,381

Total liabilities
3,717,924

 
3,589,084

Commitments and Contingencies


 


EQUITY
 
 
 
Preference shares
315,000


315,000

Common shares ($0.01 par value; 73,796,849 and 73,595,897 shares issued in 2014 and 2013, respectively; 72,828,662 and 72,633,561 shares outstanding in 2014 and 2013, respectively)
738


736

Additional paid-in capital
575,201


574,522

Accumulated other comprehensive income
63,578


25,784

Retained earnings
199,506


211,602

Treasury shares, at cost (968,187 and 962,336 shares in 2014 and 2013, respectively)
(3,867
)

(3,801
)
Total Maiden shareholders’ equity
1,150,156

 
1,123,843

Noncontrolling interest in subsidiaries
476


452

Total equity
1,150,632

 
1,124,295

Total liabilities and equity
$
4,868,556

 
$
4,713,379

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 per share data)


For the Three Months Ended March 31,
 
2014

2013
Revenues:
 
 
 
 
Gross premiums written
 
$
722,382


$
714,720

Net premiums written
 
$
709,892


$
689,059

Change in unearned premiums
 
(190,662
)

(200,617
)
Net premiums earned
 
519,230

 
488,442

Other insurance revenue
 
5,162


5,215

Net investment income
 
27,842


21,979

Net realized gains on investment
 
88


3,283

Total revenues
 
552,322

 
518,919

Expenses:
 
 
 
 
Net loss and loss adjustment expenses
 
351,344


334,895

Commission and other acquisition expenses
 
146,082


132,330

General and administrative expenses
 
14,924


14,095

Interest and amortization expenses
 
8,064


9,570

Accelerated amortization of junior subordinated debt discount and issuance cost
 
28,240



Amortization of intangible assets
 
819


945

Foreign exchange and other gains
 
(138
)

(1,547
)
Total expenses
 
549,335

 
490,288

Income before income taxes
 
2,987

 
28,631

Income tax expense
 
926

 
524

Net income
 
2,061

 
28,107

Less: Income attributable to noncontrolling interest
 
(39
)

(27
)
Net income attributable to Maiden shareholders
 
2,022

 
28,080

Dividends on preference shares
 
(6,084
)
 
(3,094
)
Net income (loss) attributable to Maiden common shareholders
 
$
(4,062
)
 
$
24,986

Basic earnings (loss) per share attributable to Maiden common shareholders
 
$
(0.06
)

$
0.35

Diluted earnings (loss) per share attributable to Maiden common shareholders
 
$
(0.06
)

$
0.34

Dividends declared per common share
 
$
0.11

 
$
0.09


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,
 
2014

2013
Comprehensive income:
 
 
 
 
Net income
 
$
2,061

 
$
28,107

Other comprehensive income (loss)
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale fixed maturities arising during the period (net of tax of $(29) and $7 for the three months ended March 31, 2014 and 2013, respectively)
 
38,031

 
(7,848
)
Adjustment for reclassification of net realized gains recognized in net income, net of tax
 
(71
)
 
(3,081
)
Foreign currency translation adjustment
 
(166
)
 
2,886

Other comprehensive income (loss)
 
37,794

 
(8,043
)
Comprehensive income
 
39,855

 
20,064

Net income attributable to noncontrolling interest
 
(39
)
 
(27
)
Other comprehensive loss attributable to noncontrolling interest
 

 
11

Comprehensive income attributable to noncontrolling interest
 
(39
)
 
(16
)
Comprehensive income attributable to Maiden shareholders
 
$
39,816

 
$
20,048



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,

2014

2013
Preference shares
 
 
 
 
Beginning balance
 
$
315,000

 
$
150,000

Ending balance
 
315,000

 
150,000

Common shares
 
 
 
 
Beginning balance
 
736

 
733

Exercise of options and issuance of shares
 
2

 
1

Ending balance
 
738

 
734

Additional paid-in capital
 
 
 
 
Beginning balance
 
574,522

 
575,869

Exercise of options and issuance of common shares
 
182

 
339

Share based compensation expense
 
497

 
309

Ending balance
 
575,201

 
576,517

Accumulated other comprehensive income
 
 
 
 
Beginning balance
 
25,784

 
141,130

Change in net unrealized gains (losses) on investments, net
 
37,960

 
(10,929
)
Foreign currency translation adjustments
 
(166
)
 
2,897

Ending balance
 
63,578

 
133,098

Retained earnings
 
 
 
 
Beginning balance
 
211,602

 
151,308

Net income attributable to Maiden shareholders
 
2,022

 
28,080

Dividends on preference shares
 
(6,084
)
 
(3,094
)
Dividends on common shares
 
(8,034
)
 
(6,520
)
Ending balance
 
199,506

 
169,774

Treasury shares
 
 
 
 
Beginning balance
 
(3,801
)
 
(3,801
)
Shares repurchased for treasury
 
(66
)
 

Ending balance
 
(3,867
)
 
(3,801
)
Noncontrolling interest in subsidiaries
 
 
 
 
Beginning balance
 
452

 
372

Dividend paid to noncontrolling interest
 
(15
)
 
(15
)
Net income attributable to noncontrolling interest
 
39

 
27

Foreign currency translation adjustments
 

 
(11
)
Ending balance
 
476

 
373

Total equity
 
$
1,150,632

 
$
1,026,695

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,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
2,061

 
$
28,107

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
1,190

 
1,312

Net realized gains on investment
 
(88
)
 
(3,283
)
Foreign exchange and other gains
 
(138
)
 
(1,547
)
Amortization of share-based compensation expense, bond premium and discount, subordinated debt discount and accelerated amortization of junior subordinated debt discount and issuance cost, net
 
30,201

 
3,066

Changes in assets – (increase) decrease:
 
 
 
 
Reinsurance balances receivable, net
 
(114,814
)
 
(210,319
)
Prepaid reinsurance premiums
 
7,316

 
(61
)
Reinsurance recoverable on unpaid losses
 
710

 
(7,235
)
Accrued investment income
 
(17
)
 
(219
)
Deferred commission and other acquisition expenses
 
(43,676
)
 
(41,915
)
Other assets
 
5,878

 
2,337

Changes in liabilities – increase (decrease):
 
 
 
 
Reserve for loss and loss adjustment expenses
 
77,580

 
48,328

Unearned premiums
 
183,339

 
200,678

Accrued expenses and other liabilities
 
(5,852
)
 
(3,051
)
Net cash provided by operating activities
 
143,690

 
16,198

Cash flows from investing activities:
 
 
 
 
Purchases of fixed maturities – available-for-sale
 
(152,969
)
 
(178,122
)
Purchases of other investments
 
(787
)
 
(290
)
Proceeds from sales of fixed maturities – available-for-sale
 
105,334

 
45,379

Proceeds from maturities and calls of fixed maturities
 
77,292

 
138,654

Proceeds from redemption of other investments
 
313

 
73

(Increase) decrease in restricted cash and cash equivalents
 
(73,852
)
 
5,011

Other, net
 
(624
)
 
(99
)
Net cash (used in) provided by investing activities
 
(45,293
)
 
10,606

Cash flows from financing activities:
 
 
 
 
Repayment of junior subordinated debt
 
(152,500
)
 

Common share issuance
 
184

 
340

Dividends paid to common shareholders
 
(8,000
)
 

Dividends paid to preference shareholders
 
(6,084
)
 
(3,094
)
Net cash used in financing activities
 
(166,400
)
 
(2,754
)
Effect of exchange rate changes on foreign currency cash
 
208

 
(1,804
)
Net (decrease) increase in cash and cash equivalents
 
(67,795
)
 
22,246

Cash and cash equivalents, beginning of period
 
139,833

 
81,543

Cash and cash equivalents, end of period
 
$
72,038

 
$
103,789


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

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, 2013.

Certain reclassifications have been made for 2013 to conform to the 2014 presentation and have no impact on net income previously reported.

2. Significant Accounting Policies

There have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2013, except as discussed below:

Recently Adopted Accounting Standards Updates

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists

On July 18, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11 which provides guidance on the presentation of an unrecognized tax benefit when a net operating loss ("NOL") carry-forward, a similar tax loss, or a tax credit carry-forward exists. Under this ASU, an entity must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a NOL carry-forward, similar tax loss, or a tax credit carry-forward. There are two exceptions to this form of presentation as follows:

To the extent a NOL carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position; and

The entity does not intend to use the deferred tax asset for this purpose.

If either of these conditions exists, an entity should present an unrecognized benefit in the financial statements as a liability and should not net the unrecognizable tax benefit with a deferred tax asset.

The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The update was adopted effective January 1, 2014. The adoption of this guidance did not have an impact on our results of operations, financial condition or liquidity.

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.

8

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




2. Significant Accounting Policies

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 update was adopted effective January 1, 2014. The adoption of this guidance did not have an impact on our results of operations, financial condition or liquidity.

Recently Issued Accounting Standards Not Yet Adopted

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

On April 10, 2014, the FASB issued ASU 2014-08, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about disposal transactions that both meet and do not meet the discontinued-operations criteria. Under the previous guidance, the results of operations of a component of an entity were classified as a discontinued operation if all of the following conditions were met:

The component has been disposed of or is classified as held for sale;

The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction; and

The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

The revised guidance will change how entities identify disposal transactions under U.S. GAAP by eliminating the second and third criteria above for classifying operations as discontinued. The new guidance instead requires classification of a component or group of components as discontinued operations if it represents a strategic shift that has or will have a major impact on an entity’s operations or financial results.

The amendments in this ASU are effective prospectively to all disposals (or classifications as held for sale) that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014. Early adoption is permitted. Entities are prohibited from applying the new ASU to any component that is classified as held for sale before the adoption date. The Company is currently evaluating the impact of the adoption of this new guidance on its consolidated results of operations and financial condition.

3. Segments

The Company currently operates three business segments, Diversified Reinsurance, AmTrust Quota Share Reinsurance and the NGHC Quota Share (which is currently in run-off). 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, 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.

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)

Fee-generating business, which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. To the extent that the fees are generated on underlying insurance contracts sold to third parties that are then ceded under quota share reinsurance contracts with Maiden Insurance Company Ltd. ("Maiden Bermuda"), a proportionate share of the fee is offset against the related acquisition expense. To the extent that 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 our operating segment's underwriting results and the reconciliation of our operating segments to net income:
For the Three Months Ended March 31, 2014

Diversified Reinsurance

AmTrust Quota Share Reinsurance

NGHC
Quota Share

Total
Net premiums written

$
291,619


$
419,010


$
(737
)

$
709,892

Net premiums earned

$
199,316


$
304,922


$
14,992


$
519,230

Other insurance revenue

5,162






5,162

Net loss and loss adjustment expenses

(141,364
)

(199,544
)

(10,436
)

(351,344
)
Commission and other acquisition expenses

(50,841
)

(90,485
)

(4,756
)

(146,082
)
General and administrative expenses

(10,990
)

(548
)

(199
)

(11,737
)
Underwriting income (loss)

$
1,283


$
14,345


$
(399
)

$
15,229

Reconciliation to net income












Net investment income and realized gains on investment










27,930

Amortization of intangible assets










(819
)
Foreign exchange and other gains










138

Interest and amortization expenses










(8,064
)
Accelerated amortization of junior subordinated debt discount and issuance cost
 
 
 
 
 
 
 
(28,240
)
Other general and administrative expenses










(3,187
)
Income tax expense










(926
)
Net income










$
2,061














Net loss and loss adjustment expense ratio*

69.1
%

65.4
%

69.6
%

67.0
%
Commission and other acquisition expense ratio**

24.9
%

29.7
%

31.7
%

27.9
%
General and administrative expense ratio***

5.4
%

0.2
%

1.4
%

2.8
%
Combined ratio****

99.4
%

95.3
%

102.7
%

97.7
%

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, 2013
 
Diversified Reinsurance
 
AmTrust Quota Share Reinsurance
 
NGHC
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
 
 
 
 
 
 
 
 
Net investment income and realized gains on investment
 
 
 
 
 
 
 
25,262

Amortization of intangible assets
 
 
 
 
 
 
 
(945
)
Foreign exchange and other gains
 
 
 
 
 
 
 
1,547

Interest and amortization expenses
 
 
 
 
 
 
 
(9,570
)
Other general and administrative expenses
 
 
 
 
 
 
 
(2,634
)
Income tax expense
 
 
 
 
 
 
 
(524
)
Net income
 
 
 
 
 
 
 
$
28,107

 
 
 
 
 
 
 
 
 
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
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

*
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)

The following table summarizes the financial position of our operating segments as of March 31, 2014 and December 31, 2013:
March 31, 2014
 
Diversified
Reinsurance
 
AmTrust
Quota Share Reinsurance
 
NGHC Quota Share
 
Total
Reinsurance balances receivable, net
 
$
336,807

 
$
338,412

 
$

 
$
675,219

Prepaid reinsurance premiums
 
31,870

 

 

 
31,870

Reinsurance recoverable on unpaid losses
 
83,350

 

 

 
83,350

Deferred commission and other acquisition expenses
 
102,342

 
244,322

 
2,052

 
348,716

Loan to related party
 

 
167,975

 

 
167,975

Goodwill and intangible assets, net
 
89,794

 

 

 
89,794

Restricted cash and cash equivalents and investments
 
1,032,818

 
1,221,365

 
106,328

 
2,360,511

Other assets
 
28,617

 

 

 
28,617

Total assets - operating segments
 
1,705,598

 
1,972,074

 
108,380

 
3,786,052

Corporate assets
 

 

 

 
1,082,504

Total Assets
 
$
1,705,598

 
$
1,972,074

 
$
108,380

 
$
4,868,556


December 31, 2013
 
Diversified
Reinsurance
 
AmTrust
Quota Share Reinsurance
 
NGHC
Quota Share
 
Total
Reinsurance balances receivable, net
 
$
260,882

 
$
278,573

 
$
20,690

 
$
560,145

Prepaid reinsurance premiums
 
39,186

 

 

 
39,186

Reinsurance recoverable on unpaid losses
 
84,036

 

 

 
84,036

Deferred commission and other acquisition expenses
 
88,482

 
209,439

 
6,987

 
304,908

Loan to related party
 

 
167,975

 

 
167,975

Goodwill and intangible assets, net
 
90,613

 

 

 
90,613

Restricted cash and cash equivalents and investments
 
1,029,537

 
1,098,409

 
103,752

 
2,231,698

Other assets
 
32,358

 

 

 
32,358

Total assets - operating segments
 
1,625,094

 
1,754,396

 
131,429

 
3,510,919

Corporate assets
 

 

 

 
1,202,460

Total Assets
 
$
1,625,094

 
$
1,754,396

 
$
131,429

 
$
4,713,379



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, 2014 and 2013:

For the Three Months Ended March 31,
 
2014

2013
Net premiums written
 
Total
 
% of Total
 
Total
 
% of Total
Diversified Reinsurance
 
 
 
 
 
 
 
 
Property
 
$
62,581

 
8.8
 %
 
$
69,522

 
10.1
%
Casualty
 
171,754

 
24.2
 %
 
148,423

 
21.5
%
Accident and Health
 
17,222

 
2.4
 %
 
15,529

 
2.2
%
International
 
40,062

 
5.7
 %
 
34,136

 
5.0
%
Total Diversified Reinsurance
 
291,619

 
41.1
 %
 
267,610

 
38.8
%
AmTrust Quota Share Reinsurance
 
 
 
 
 
 
 
 
Small Commercial Business
 
253,757

 
35.7
 %
 
162,018

 
23.5
%
Specialty Program
 
31,798

 
4.5
 %
 
34,946

 
5.1
%
Specialty Risk and Extended Warranty
 
133,455

 
18.8
 %
 
147,854

 
21.5
%
Total AmTrust Quota Share Reinsurance
 
419,010

 
59.0
 %
 
344,818

 
50.1
%
NGHC Quota Share
 
 
 
 
 
 
 
 
Automobile Liability
 
(534
)
 
(0.1
)%
 
44,339

 
6.4
%
Automobile Physical Damage
 
(203
)
 
 %
 
32,292

 
4.7
%
Total NGHC Quota Share
 
(737
)
 
(0.1
)%
 
76,631

 
11.1
%
 
 
$
709,892

 
100.0
 %
 
$
689,059

 
100.0
%
For the Three Months Ended March 31,
 
2014
 
2013
Net premiums earned
 
Total
 
% of Total
 
Total
 
% of Total
Diversified Reinsurance
 
 
 
 
 
 
 
 
Property
 
$
40,595

 
7.8
%
 
$
47,547

 
9.7
%
Casualty
 
121,887

 
23.5
%
 
117,059

 
24.0
%
Accident and Health
 
8,886

 
1.7
%
 
8,633

 
1.8
%
International
 
27,948

 
5.4
%
 
23,010

 
4.7
%
Total Diversified Reinsurance
 
199,316

 
38.4
%
 
196,249

 
40.2
%
AmTrust Quota Share Reinsurance
 
 
 
 
 
 
 
 
Small Commercial Business
 
158,605

 
30.5
%
 
102,257

 
20.9
%
Specialty Program
 
32,853

 
6.3
%
 
33,346

 
6.8
%
Specialty Risk and Extended Warranty
 
113,464

 
21.9
%
 
84,685

 
17.3
%
Total AmTrust Quota Share Reinsurance
 
304,922

 
58.7
%
 
220,288

 
45.0
%
NGHC Quota Share
 
 
 
 
 
 
 
 
Automobile Liability
 
9,096

 
1.8
%
 
41,630

 
8.6
%
Automobile Physical Damage
 
5,896

 
1.1
%
 
30,275

 
6.2
%
Total NGHC Quota Share
 
14,992

 
2.9
%
 
71,905

 
14.8
%
 
 
$
519,230

 
100.0
%
 
$
488,442

 
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, 2014 and December 31, 2013, are as follows:
March 31, 2014
 
Original or
amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
16,616

 
$
519

 
$

 
$
17,135

U.S. agency bonds – mortgage-backed
 
1,257,045

 
12,632

 
(34,207
)
 
1,235,470

U.S. agency bonds – other
 
7,208

 
988

 

 
8,196

Non-U.S. government bonds
 
70,806

 
3,490

 
(331
)
 
73,965

Other mortgage-backed securities
 
43,952

 
416

 

 
44,368

Corporate bonds
 
1,638,912

 
98,508

 
(11,652
)
 
1,725,768

Municipal bonds – other
 
62,136

 
1,781

 

 
63,917

Total available-for-sale fixed maturities
 
3,096,675

 
118,334

 
(46,190
)
 
3,168,819

Other investments
 
5,083

 
690

 

 
5,773

Total investments
 
$
3,101,758

 
$
119,024

 
$
(46,190
)
 
$
3,174,592

December 31, 2013
 
Original or
amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
16,622

 
$
587

 
$

 
$
17,209

U.S. agency bonds – mortgage-backed
 
1,292,032

 
11,727

 
(41,104
)
 
1,262,655

U.S. agency bonds – other
 
7,207

 
901

 

 
8,108

Non-U.S. government bonds
 
70,377

 
3,547

 
(712
)
 
73,212

Other mortgage-backed securities
 
33,676

 

 
(232
)
 
33,444

Corporate bonds
 
1,546,578

 
82,952

 
(22,830
)
 
1,606,700

Municipal bonds – auction rate
 
99,170

 

 

 
99,170

Municipal bonds – other
 
62,130

 
934

 
(1,495
)
 
61,569

Total available-for-sale fixed maturities
 
3,127,792

 
100,648

 
(66,373
)
 
3,162,067

Other investments
 
4,522

 
570

 

 
5,092

Total investments
 
$
3,132,314

 
$
101,218

 
$
(66,373
)
 
$
3,167,159


The contractual maturities of our fixed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without prepayment penalties.

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)

March 31, 2014
 
Amortized cost
 
Fair value
 
% of Total fair value
Maturity
 
 
 
 
 
 
Due in one year or less
 
$
54,893

 
$
56,249

 
1.8
%
Due after one year through five years
 
422,796

 
459,480

 
14.5
%
Due after five years through ten years
 
1,226,383

 
1,277,651

 
40.3
%
Due after ten years
 
91,606

 
95,601

 
3.0
%
 
 
1,795,678

 
1,888,981

 
59.6
%
U.S. agency bonds – mortgage-backed
 
1,257,045

 
1,235,470

 
39.0
%
Other mortgage-backed securities
 
43,952

 
44,368

 
1.4
%
Total available-for-sale fixed maturities
 
$
3,096,675

 
$
3,168,819

 
100.0
%

The following tables summarize fixed maturities and other investments in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
 
Less than 12 Months
 
12 Months or more
 
Total
March 31, 2014
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available-for-sale fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency bonds – mortgage-backed
 
$
743,882

 
$
(30,320
)
 
$
109,169

 
$
(3,887
)
 
$
853,051

 
$
(34,207
)
Non–U.S. government bonds
 
7,968

 
(331
)
 

 

 
7,968

 
(331
)
Corporate bonds
 
183,710

 
(6,590
)
 
168,371

 
(5,062
)
 
352,081

 
(11,652
)
Total temporarily impaired available-for-sale fixed maturities
 
$
935,560

 
$
(37,241
)
 
$
277,540

 
$
(8,949
)
 
$
1,213,100

 
$
(46,190
)

As of March 31, 2014, there were approximately 103 securities in an unrealized loss position with a fair value of $1,213,100 and unrealized losses of $46,190. Of these securities, there are 24 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $277,540 and unrealized losses of $8,949.

 
 
Less than 12 Months
 
12 Months or more
 
Total
December 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
 
$
795,439

 
$
(38,421
)
 
$
60,602

 
$
(2,683
)
 
$
856,041

 
$
(41,104
)
Non–U.S. government bonds
 
9,946

 
(712
)
 

 

 
9,946

 
(712
)
Other mortgage-backed securities
 
33,444

 
(232
)
 

 

 
33,444

 
(232
)
Corporate bonds
 
463,469

 
(16,687
)
 
169,294

 
(6,143
)
 
632,763

 
(22,830
)
Municipal bonds  – other
 
50,545

 
(1,495
)
 

 

 
50,545

 
(1,495
)
Total temporarily impaired available-for-sale fixed maturities
 
$
1,352,843

 
$
(57,547
)
 
$
229,896

 
$
(8,826
)
 
$
1,582,739

 
$
(66,373
)

As of December 31, 2013, there were approximately 140 securities in an unrealized loss position with a fair value of $1,582,739 and unrealized losses of $66,373. Of these securities, there are 19 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $229,896 and unrealized losses of $8,826.

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)

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, 2014, 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, 2014 and 2013, 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, 2014 were primarily due to widening of credit spreads since their date of purchase. 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, 2014.

The following summarizes the credit ratings of our available-for-sale fixed maturities:
Rating* as of March 31, 2014
 
Amortized cost
 
Fair value
 
% of Total
fair value
U.S. treasury bonds
 
$
16,616

 
$
17,135

 
0.5
%
U.S. agency bonds  
 
1,264,253

 
1,243,666

 
39.2
%
AAA
 
216,123

 
231,871

 
7.3
%
AA+, AA, AA-
 
138,743

 
147,363

 
4.7
%
A+, A, A-
 
688,926

 
729,160

 
23.0
%
BBB+, BBB, BBB-
 
716,179

 
742,241

 
23.5
%
BB+ or lower
 
55,835

 
57,383

 
1.8
%
Total
 
$
3,096,675

 
$
3,168,819

 
100.0
%
Rating* as of December 31, 2013
 
Amortized cost
 
Fair value
 
% of Total
fair value
U.S. treasury bonds
 
$
16,622

 
$
17,209

 
0.5
%
U.S. agency bonds
 
1,299,239

 
1,270,763

 
40.2
%
AAA
 
210,872

 
222,417

 
7.0
%
AA+, AA, AA-
 
236,424

 
242,986

 
7.7
%
A+, A, A-
 
619,148

 
651,248

 
20.6
%
BBB+, BBB, BBB-
 
689,532

 
701,529

 
22.2
%
BB+ or lower
 
55,955

 
55,915

 
1.8
%
Total
 
$
3,127,792

 
$
3,162,067

 
100.0
%
*Ratings as assigned by Standard & Poor’s ("S&P")

(b) Other Investments

The table below shows our portfolio of other investments:
 
 
March 31, 2014
 
December 31, 2013
 
 
Fair value
 
% of Total fair value
 
Fair value
 
% of Total fair value
Investments in limited partnerships
 
$
4,773

 
82.7
%
 
$
4,092

 
80.4
%
Other
 
1,000

 
17.3
%
 
1,000

 
19.6
%
Total other investments
 
$
5,773

 
100.0
%
 
$
5,092

 
100.0
%

The Company has an unfunded commitment on its investments in limited partnerships of approximately $1,380 as of March 31, 2014.

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)

(c) Net Realized Gains on Investment

Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method. The following provides an analysis of net realized gains on investment included in the Condensed Consolidated Statements of Income for the three months ended March 31, 2014 and 2013:
For the Three Months Ended March 31, 2014
 
Gross gains
 
Gross losses
 
Net
Available-for-sale fixed maturities
 
$
1

 
$

 
$
1

Other investments
 
87

 

 
87

Net realized gains on investment
 
$
88

 
$

 
$
88

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

 
 
 
 
 
 
 
Proceeds from sales of fixed maturities classified as available-for-sale were $105,334 and $45,379 for the three months ended March 31, 2014 and 2013, respectively. Net unrealized gains were as follows:
 
 
March 31, 2014
 
December 31, 2013
Available-for-sale fixed maturities
 
$
72,144

 
$
34,275

Other investments
 
690

 
570

Total net unrealized gains
 
72,834

 
34,845

Deferred income tax expense
 
(146
)
 
(117
)
Net unrealized gains, net of deferred income tax
 
$
72,688

 
$
34,728

Change in net unrealized gains, net of deferred income tax
 
$
37,960

 
$
(108,937
)

(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, 2014

December 31, 2013
Restricted cash and cash equivalents – third party agreements
 
$
64,326

 
$
72,877

Restricted cash and cash equivalents – related party agreements
 
86,866

 
4,429

Restricted cash and cash equivalents  – U.S. state regulatory authorities
 
20

 
54

Total restricted cash and cash equivalents
 
151,212

 
77,360

Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2014 – $934,906; 2013 – $933,897)
 
952,147

 
939,800

Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2014 – $1,211,944; 2013 – $1,183,156)
 
1,244,654

 
1,201,473

Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2014 – $12,216; 2013 – $12,730)
 
12,498

 
13,065

Total restricted investments
 
2,209,299

 
2,154,338

Total restricted cash and cash equivalents and investments
 
$
2,360,511

 
$
2,231,698


17

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

(a) Fair Values of Financial Instruments

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between open market participants at the measurement date. 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); and

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.

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. To date, we have only included U.S. government fixed maturity instruments as level 1. The Company receives the quoted market prices from a third party, a nationally recognized pricing service provider (“Pricing Service”). When quoted market prices are unavailable, the Company utilizes the Pricing Service to determine an estimate of fair value. The fair value estimates are included in the Level 2 hierarchy. The Pricing Service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. The Pricing Service’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare evaluations. In addition, the Pricing Service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The market inputs that the Pricing Service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

In accordance with ASC 820, the Company determines fair value of the financial instrument based on the price that would be received upon the sale of 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.


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)

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of March 31, 2014.

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. government agency bonds are determined 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 bonds 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 Comprised of commercial mortgage-backed securities ("CMBS"). These securities are 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 - auction rate — Comprised of auction rate securities issued by U.S. state and municipality entities or agencies. Municipal auction rate securities are reported in the Condensed Consolidated Balance Sheets at fair value which approximates their cost. As the significant inputs used to price the auction rate securities are observable market inputs, auction rate securities are classified within Level 2.
 
Municipal bonds - other — Comprised of bonds 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, municipal bonds are classified within Level 2.

Other investments — The fair values of the investments 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. The fair value of the investment in preference shares of a start-up insurance producer was determined using recent private market transactions, and as such, the fair value is 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 value reported in the accompanying balance sheets for this financial instrument approximates its fair value.

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 was determined using observable market inputs in the Black-Derman-Toy model, the fair value was included in the Level 2 fair value hierarchy for the year ended December 31, 2013. On January 15, 2014, the Company's wholly owned U.S. holding company, Maiden Holdings North America, Ltd. ("Maiden NA"), repurchased all of the outstanding junior subordinated debt in an amount equal to $126,381.

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)

(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, 2014 and December 31, 2013, we classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
March 31, 2014
 
Quoted Prices
in Active
Markets for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Fixed maturities
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
17,135

 
$

 
$

 
$
17,135

U.S. agency bonds – mortgage-backed
 

 
1,235,470

 

 
1,235,470

U.S. agency bonds – other
 

 
8,196

 

 
8,196

Non-U.S. government bonds
 

 
73,965

 

 
73,965

Other mortgage-backed securities
 

 
44,368

 

 
44,368

Corporate bonds
 

 
1,725,768

 

 
1,725,768

Municipal bonds – other
 

 
63,917

 

 
63,917

Other investments
 

 

 
5,773

 
5,773

Total
 
$
17,135

 
$
3,151,684

 
$
5,773

 
$
3,174,592

As a percentage of total assets
 
0.4
%
 
64.7
%
 
0.1
%
 
65.2
%
December 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
Fixed maturities
 
 
 
 
 
 
 
 
U.S. treasury bonds
 
$
17,209

 
$

 
$

 
$
17,209

U.S. agency bonds – mortgage-backed
 

 
1,262,655

 

 
1,262,655

U.S. agency bonds – other
 

 
8,108

 

 
8,108

Non-U.S. government bonds
 

 
73,212

 

 
73,212

Other mortgage-backed securities
 

 
33,444

 

 
33,444

Corporate bonds
 

 
1,606,700

 

 
1,606,700

Municipal bonds – auction rate
 

 
99,170

 

 
99,170

Municipal bonds – other
 

 
61,569

 

 
61,569

Other investments