Attached files

file filename
EX-32.2 - Maiden Holdings, Ltd.v192933_ex32-2.htm
EX-32.1 - Maiden Holdings, Ltd.v192933_ex32-1.htm
EX-31.2 - Maiden Holdings, Ltd.v192933_ex31-2.htm
EX-31.1 - Maiden Holdings, Ltd.v192933_ex31-1.htm

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 June 30, 2010
 
o 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
98-0570192
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
   
131 Front Street, Hamilton, Bermuda
HM12
(Address of principal executive offices)
(Zip Code)
 
(441) 292-7090
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
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  o     No  o
 
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 o
 
Accelerated filer x
     
Non-accelerated filer o (Do not check if a smaller reporting
company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No x
 
As of August 5, 2010, the Registrant had one class of Common Stock ($.01 par value),
of which 70,293,106 shares were issued and outstanding.

 
 

 
 
INDEX
 
   
Page
PART I - Financial Information
   
Item 1.   Financial Statements
   
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
 
3
     
Condensed Consolidated Statement of Income and Comprehensive Income for the three and six months ended June 30, 2010 and 2009 (unaudited)
 
4
     
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2010 and 2009 (unaudited)
 
5
     
Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)
 
6
     
Notes to Unaudited Condensed Consolidated Financial Statements
 
7
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
51
Item 4.   Controls and Procedures
 
53
PART II - Other Information
   
Item 6.   Exhibits
 
54
              Signatures
 
55

 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
 
   
June 30, 
2010
(Unaudited)
   
December 31, 
2009
(Audited)
 
ASSETS
           
Investments:
           
Fixed maturities, available for sale, at fair value
(Amortized cost 2010: $1,576,293; 2009: $1,623,382)
  $ 1,633,906     $ 1,661,692  
Other investments, at fair value (Cost 2010: $5,801; 2009:$5,684)
    5,677       5,549  
Total investments
    1,639,583       1,667,241  
Cash and cash equivalents
    179,063       107,396  
Restricted cash and cash equivalents
    168,396       144,944  
Accrued investment income
    13,643       11,405  
Reinsurance balances receivable (includes $95,610 and $43,382 from related parties in 2010 and 2009, respectively)
    271,199       208,495  
Prepaid reinsurance
    31,762       28,752  
Reinsurance recoverable on unpaid losses
    12,144       11,984  
Loan to related party
    167,975       167,975  
Deferred commission and other acquisition costs (includes $113,425 and $85,979 from related parties in 2010 and 2009, respectively)
    196,912       172,983  
Other assets
    54,855       11,818  
Intangible assets, net
    48,380       51,284  
Goodwill
    52,617       52,617  
Total assets
  $ 2,836,529     $ 2,636,894  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Reserve for loss and loss adjustment expenses (includes $215,506 and $174,046 from related parties in 2010 and 2009, respectively)
  $ 1,077,084     $ 1,006,320  
Unearned premiums (includes $346,126 and $264,751 from related parties in 2010 and 2009, respectively)
    664,685       583,478  
Accrued expenses and other liabilities
    83,843       60,044  
Securities sold under agreements to repurchase, at contract value
    70,972       95,401  
Junior subordinated debt
    215,156       215,125  
Total liabilities
    2,111,740       1,960,368  
Commitments and Contingencies
               
Shareholders’ equity
               
Common shares ($0.01 par value;71,254,437 and 71,253,625 shares issued in 2010 and 2009, respectively;70,292,101 and 70,291,289 shares outstanding in 2010 and 2009, respectively)
    713       713  
Additional paid-in capital
    576,539       576,086  
Accumulated other comprehensive income
    57,489       32,747  
Retained earnings
    93,849       70,781  
Treasury shares, at cost (2010 and 2009: 962,336 shares)
    (3,801 )     (3,801 )
Total shareholders’ equity
    724,789       676,526  
Total liabilities and shareholders’ equity
  $ 2,836,529     $ 2,636,894  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
3

 
 
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(In Thousands of United States Dollars, Except Per Share Data)
(Unaudited)
 
   
For the Three
Months Ended
June 30, 2010
   
For the Three
Months Ended
June 30, 2009
   
For the Six
Months Ended
June 30, 2010
   
For the Six
Months Ended
June 30, 2009
 
Revenues:
                       
Gross premiums written
  $ 334,784     $ 238,356     $ 662,166     $ 574,905  
Net premiums written
  $ 313,050     $ 238,356     $ 624,341     $ 574,905  
Change in unearned premiums
    (29,266 )     (14,515 )     (76,628 )     (140,972 )
Net earned premium
    283,784       223,841       547,713       433,933  
Net investment income
    18,875       15,113       36,456       29,372  
Net realized and unrealized investment gains (losses)
    535       1,534       847       (396 )
Total revenues
    303,194       240,488       585,016       462,909  
Expenses:
                               
Loss and loss adjustment expenses
    175,354       151,057       345,639       297,345  
Commission and other acquisition expenses
    88,447       57,664       165,843       104,295  
Other operating expenses
    9,484       7,133       18,036       14,667  
Subordinated debt interest expense
    9,116       9,112       18,231       16,202  
Amortization of intangible assets
    1,452       1,675       2,904       3,239  
Foreign exchange loss (gain)
    414       (2,404 )     1,567       (2,191 )
Total expenses
    284,267       224,237       552,220       433,557  
Income before income taxes
    18,927       16,251       32,796       29,352  
Income taxes:
                               
Current tax expense
                       
Deferred tax expense
    290             590        
Income tax expense
    290             590        
Net income
  $ 18,637     $ 16,251     $ 32,206     $ 29,352  
                                 
Comprehensive income:
                               
Net income
  $ 18,637     $ 16,251     $ 32,206     $ 29,352  
Other comprehensive income
                               
Net unrealized holdings gains arising during the period
    3,784       47,423       28,308       29,006  
Adjustment for reclassification of realized (gains) losses recognized in net income
    (3,254 )     (1,534 )     (3,566 )     396  
Other comprehensive income
    530       45,889       24,742       29,402  
Comprehensive income
  $ 19,167     $ 62,140     $ 56,948     $ 58,754  
                                 
Basic earnings per common share
  $ 0.27     $ 0.23     $ 0.46     $ 0.43  
Diluted earnings per common share
  $ 0.26     $ 0.23     $ 0.46     $ 0.42  
Dividends declared per common share
  $ 0.065     $ 0.06     $ 0.13     $ 0.12  
 
   
For the Three
Months Ended
June 30, 2010
   
For the Three
Months Ended
June 30, 2009
   
For the Six
Months Ended
June 30, 2010
   
For the Six
Months Ended
June 30, 2009
 
Net realized and unrealized investment gains (losses):
                       
Total other-than-temporary impairment losses
  $     $     $     $  
Portion of loss recognized in other comprehensive income
                       
Net impairment losses recognized in earnings
                       
Other net realized and unrealized investment gains (losses)
    535       1,534       847       (396 )
Net realized and unrealized investment gains (losses)
  $ 535     $ 1,534     $ 847     $ (396 )
 
 See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
4

 
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands of United States Dollars)
(Unaudited)
 
   
For the Six
Months Ended
June 30, 2010
   
For the Six
Months Ended
June 30, 2009
 
Common shares
           
Balance – beginning of period
  $ 713     $ 596  
Exercise of options and issuance of shares, net
          117  
Balance – end of period
    713       713  
Additional paid-in capital
               
Balance – beginning of period
    576,086       530,519  
Exercise of options and issuance of shares, net
    3       44,928  
Share based compensation
    450       276  
Balance – end of period
    576,539       575,723  
Accumulated other comprehensive income (loss)
               
Balance – beginning of period
    32,747       (44,499 )
Net unrealized gains on securities
    24,742       29,402  
Balance – end of period
    57,489       (15,097 )
Retained earnings
               
Balance – beginning of period
    70,781       26,944  
Net income
    32,206       29,352  
Dividends on common shares
    (9,138 )     (8,435 )
Balance – end of period
    93,849       47,861  
Treasury shares
               
Balance – beginning of period
    (3,801 )     (3,801 )
Shares repurchased
           
Balance – end of period
    (3,801 )     (3,801 )
Total Shareholders’ Equity
  $ 724,789     $ 605,399  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
5

 
 
MAIDEN HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of United States Dollars)
(Unaudited)
 
   
For the Six
Months Ended
June 30, 2010
   
For the Six
Months Ended
June 30, 2009
 
Cash flows from operating activities:
           
Net income
  $ 32,206     $ 29,352  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization of intangibles
    3,530       3,502  
Net realized and unrealized (gain) loss on investments
    (847 )     396  
Foreign exchange loss (gain) on revaluation
    1,567       (2,191 )
Amortization of share-based compensation expense, bond premium and discount and trust preferred securities discount
    (3,599 )     (2,822 )
Changes in assets - (increase) decrease:
               
Reinsurance balances receivable
    (77,450 )     (157,679 )
Prepaid reinsurance
    (3,010 )      
Accrued investment income
    (2,238 )     (308 )
Deferred commission and other acquisition costs
    (23,929 )     (66,925 )
Other assets
    42,745       (1,041 )
Changes in liabilities – increase (decrease):
               
Loss and loss adjustment expense reserves
    70,776       42,102  
Unearned premiums
    81,207       140,972  
Accrued expenses and other liabilities
    36,978       (24,011 )
Net cash provided by (used in) operating activities
    72,446       (38,653 )
Cash flows from investing activities:
               
Purchases of investments:
               
Purchases of fixed-maturity securities – available for sale
    (406,277 )     (415,611 )
Purchases of fixed-maturity securities – trading
    (509,394 )      
Purchases of other investments
    (123 )     (138 )
Sale of investments:
               
Proceeds from sales of fixed-maturity securities – available for sale
    173,687       134,384  
Proceeds from sales of fixed-maturity securities – trading and short sales
    558,388        
Proceeds from maturities and calls of fixed-maturity securities
    241,703       116,139  
Proceeds from redemption of other investments
    6       127  
(Increase) decrease in restricted cash and cash equivalents
    (23,452 )     97,394  
Loan to related party
           
Purchase of capital assets
    (918 )     (201 )
Net cash provided by (used in) in investing activities
    33,620       (67,906 )
Cash flows from financing activities:
               
Repurchase agreements, net
    (24,429 )     (123,849 )
Common share issuance
    3       117  
Junior subordinated debt issuance
          260,000  
Junior subordinated debt issuance cost
          (4,342 )
Dividend paid
    (9,138 )     (7,733 )
Net cash (used in) provided by financing activities
    (33,564 )     124,193  
Effect of exchange rate changes on foreign currency cash
    (835 )     1,246  
Net increase in cash and cash equivalents
    71,667       18,880  
Cash and cash equivalents, beginning of period
    107,396       131,897  
Cash and cash equivalents, end of period
  $ 179,063     $ 150,777  
                 
Supplemental information on cash flows
               
Cash paid for interest
  $ 18,200     $ 8,594  
Reinsurance balances receivables
    17,806        
Investments - fixed maturity securities
    (17,806 )      
Supplemental information about non-cash investing and financing activities
               
Discount on junior subordinated debt
  $     $ (44,928 )
Additional paid in Capital
          44,928  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
6

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
1.
Basis of Presentation – Summary of Significant Accounting Policies
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Maiden Holdings, Ltd. and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.
 
These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
There were no material changes in the application of our critical accounting estimates subsequent to that report. However, the Company is amending its disclosure with regard to Fair Value of Financial Instruments to include the following:
 
 
·
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 investments as Level 1. The Company receives the quoted market prices from a third party, nationally recognized pricing service (“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.
 
 
·
The Company typically utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the 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. Approximately 96% of the Company’s fixed maturity investments are categorized as Level 2 within the fair value hierarchy. At June 30, 2010 and December 31, 2009, we have not adjusted any prices provided by the Pricing Service.
 
 
·
The Company will challenge any prices for its investments that are not considered to represent fair value. If a fair value is challenged, the Company will typically obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought. As of June 30, 2010 and December 31, 2009, only one security was valued using the market approach at approximately $8,549 and $7,948 was priced using a quotation from a broker as opposed to the Pricing Service. At June 30, 2010 and December 31, 2009 we have not adjusted any pricing provided by the broker-dealers based on the review performed by our investment managers.
 
 
7

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)

1.
Basis of Presentation – Summary of Significant Accounting Policies (continued)
 
 
·
To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. In addition, our process to validate the market prices obtained from the Pricing Service includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. We also periodically perform testing of the market to determine trading activity, or lack of trading activity, as well as evaluating the variability of market prices. Securities sold during the quarter are also “back-tested” (i.e., the sales prices are compared to the previous month end reported market price to determine the reasonableness of the reported market price). There were no material differences between the prices from the Pricing Service and the prices obtained from our validation procedures as of June 30, 2010 and December 31, 2009.
 
Certain reclassifications have been made for 2009 to conform to the 2010 presentation and have no impact on net income previously reported.
 
2.
Recent Accounting Pronouncements
 
Adoption of new accounting pronouncements  
 
On June 12, 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of Financial Assets,” an amendment of FASB Statement 140 and the FASB subsequently codified it as Accounting Standard Update (“ASU”) 2009-16, updating Accounting Standards Codification (“ASC”) Topic 860 “Transfers and Servicing” and it requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of financial assets accounted for as a sale. It is a revision to FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009 and interim periods within those fiscal years. The adoption of ASU 2009-16 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
On June 12, 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” and the FASB subsequently codified as ASU 2009-17, updating ASC Topic 810 “Consolidation” and it requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It determines whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009, and interim periods within those fiscal years. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
New accounting pronouncements issued during 2010 impacting the Company are as follows:  
 
In February 2010, the FASB issued ASU 2010-09, which requires SEC filers to evaluate subsequent events through the date the financial statements are issued. It exempts SEC filers from disclosing the date through which subsequent events have been evaluated.
 
On January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 amends ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), to require a number of additional disclosures regarding fair value measurements.  ASU 2010-06 specifically requires the disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for the transfers, the reasons for any transfers in or out of Level 3 and the disclosure of information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlement on a gross basis.  ASU 2010-06 also amends ASC 820 to clarify that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities.  ASU 2010-06 also clarified the requirement for entities to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.  The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated results of operations and financial condition.
 
8


MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)

2.
Recent Accounting Pronouncements (continued)
 
The Emerging Issues Task Force (“EITF”) issued EITF Issue No. 09-G, Clarification of the Definition of Deferred Acquisition Costs (DAC) of Insurance Entities and intends to clarify the definition of what constitutes an acquisition cost and the types of acquisition costs capitalized by an insurance entity. In November 2009, the EITF reached a consensus-for-exposure that would limit the costs an entity can include in DAC to those that are “directly related to” the acquisition of new and renewal insurance contracts. They clarified that the direct costs only include those that result in the successful acquisition of a policy and exclude all costs incurred for unsuccessful efforts, along with indirect costs. The consensus-for-exposure would require that an entity include only actual costs, not costs expected to be incurred, in DAC.
 
On March 18, 2010, the EITF affirmed the previous conclusions from the proposed consensus that indirect costs and costs of unsuccessful activities should not be included in capitalized acquisition costs.  The EITF also agreed that advertising costs should be capitalized only when certain requirements are met.  There were further questions on how accounting for advertising costs interacts with the DAC impairment model and further analysis was requested.  A working group was formed to assist the staff in advising the EITF on the effective date and transition questions.  They met in May 2010 and have issued a report that was discussed at an EITF meeting on July 29, 2010.  On July 29, 2010 the EITF affirmed the previous conclusions from the proposed consensus.  This literature has the potential to significantly impact the way insurance companies account for DAC, and therefore, could potentially have a significant impact on results of operations.  It would result in the need to identify and recognize, as period costs, those amounts associated with unsuccessful acquisition efforts in addition to indirect costs.  Amounts associated with successful acquisition efforts would continue to be capitalized and charged to expense in proportion to premium revenue recognized. As an example, under current guidance, underwriter salaries are capitalized and amortized over the period in which the associated premium written is earned as revenue.  Under the proposed guidance, companies would be required to identify the portion of underwriter salaries that could be attributed to unsuccessful acquisition efforts and expense that amount in the current period.  The EITF is effective for interim and annual periods beginning on or after December 15, 2011, with either prospective or retrospective application being permitted.
 
3.
Investments
 
(a)
Fixed Maturities and Other Investments
 
The original or amortized cost, estimated fair value and gross unrealized gains and losses of available-for-sale fixed maturities and other investments as of June 30, 2010 and December 31, 2009 are as follows:
 
As at June 30, 2010
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed Maturities:
                       
U.S. treasury bonds
  $ 58,359     $ 1,070     $ (32 )   $ 59,397  
U.S. agency bonds – mortgage and asset-backed
    707,139       26,283       (556 )     732,866  
U.S. agency bonds – other
    153,015       2,703       (27 )     155,691  
Corporate fixed maturities
    636,535       46,367       (19,077 )     663,825  
Municipal bonds
    21,245       882             22,127  
Total available for sale fixed maturities
    1,576,293       77,305       (19,692 )     1,633,906  
Other investments
    5,801             (124 )     5,677  
Total investments
  $ 1,582,094     $ 77,305     $ (19,816 )   $ 1,639,583  

As at December 31, 2009
 
Original or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed Maturities:
                       
U.S. treasury bonds
  $ 39,297     $ 224     $ (283 )   $ 39,238  
U.S. agency bonds – mortgage and asset-backed
    779,400       17,504       (2,321 )     794,583  
U.S. agency bonds – other
    217,192       4,772       (447 )     221,517  
Corporate fixed maturities
    564,750       37,985       (20,071 )     582,664  
Municipal bonds
    22,743       947             23,690  
Total available for sale fixed maturities
    1,623,382       61,432       (23,122 )     1,661,692  
Other investments
    5,684             (135 )     5,549  
Total investments
  $ 1,629,066     $ 61,432     $ (23,257 )   $ 1,667,241  

 
9

 
 
MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.
Investments (continued)
 
The contractual maturities of our fixed maturities as of June 30, 2010 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment.
 
As at June 30, 2010
 
Amortized Cost
   
Fair
Value
   
% of Total
Fair Value
 
Maturity
                 
Due in one year or less
  $ 141,987     $ 144,052       8.82 %
Due after one year through five years
    182,018       184,551       11.30 %
Due after five years through ten years
    471,429       493,020       30.17 %
Due after ten years
    73,720       79,417       4.86 %
      869,154       901,040       55.15 %
Mortgage and asset-backed securities
    707,139       732,866       44.85 %
Total
  $ 1,576,293     $ 1,633,906       100.00 %
 
The following tables summarize our available for sale securities and other investments in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
As at June 30, 2010
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Available-for-sale securities:
                                   
U.S. treasury bonds
  $     $     $ 3,341     $ (32 )   $ 3,341     $ (32 )
U.S. agency bonds – mortgage and asset-backed
    56,504       (556 )                 56,504       (556 )
U.S. agency bonds - other
    6,033       (27 )                 6,033       (27 )
Corporate fixed maturities
    47,560       (1,849 )     176,682       (17,228 )     224,242       (19,077 )
      110,097       (2,432 )     180,023       (17,260 )     290,120       (19,692 )
Other investments
                4,876       (124 )     4,876       (124 )
Total
  $ 110,097     $ (2,432 )   $ 184,899     $ (17,384 )   $ 294,996     $ (19,816 )
 
As of June 30, 2010, there were approximately 34 securities in an unrealized loss position with a fair value of $294,996 and unrealized losses of $19,816. Of these securities, there are 14 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $184,899 and unrealized losses of $17,384.
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
As at December 31, 2009
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
                                   
U.S. treasury bonds
  $ 8,632     $ (283 )   $     $     $ 8,632     $ (283 )
U.S. agency bonds – mortgage and asset-backed
    235,013       (2,319 )     694       (2 )     235,707       (2,321 )
U.S. agency bonds – other
    59,511       (447 )                 59,511       (447 )
Corporate fixed maturities
    11,687       (619 )     193,676       (19,452 )     205,363       (20,071 )
      314,843       (3,668 )     194,370       (19,454 )     509,213       (23,122 )
Other investments
                4,864       (135 )     4,864       (135 )
Total
  $ 314,843     $ (3,668 )   $ 199,234     $ (19,589 )   $ 514,077     $ (23,257 )
 
As of December 31, 2009, there were approximately 34 securities in an unrealized loss position with a fair value of $514,077 and unrealized losses of $23,257. Of these securities, there are 14 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $199,234 and unrealized losses of $19,589.
 
 
10

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.
Investments (continued)
 
Other-Than-Temporary Impairments (“OTTI”)
 
We review our investment portfolio for impairment on a quarterly basis. Impairment of investments results in a charge to operations when a fair value decline below cost is deemed to be other-than-temporary. As of June 30, 2010, we reviewed our portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. During the three and six month periods ended June 30, 2010 and 2009, the Company recognized no other than temporary impairment losses.  Based on our qualitative and quantitative OTTI review of each asset class within our fixed maturity portfolio, the remaining unrealized losses on fixed maturities at June 30, 2010 were primarily due to widening of credit spreads relating to the market illiquidity, rather than credit events. Because it is more likely than not that we will not 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 June 30, 2010.
 
(b)
Realized and unrealized gains and losses
 
Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method and include adjustments to the cost basis of investments for declines in value that are considered to be other-than-temporary. The Company has commenced designating upon acquisition, certain US Treasury bonds as trading for the purpose of augmenting where possible investment returns. In addition, the Company maintained one open position in a US Treasury bond sold but not yet purchased valued at $52,328 which to date has resulted in  in unrealized loss of $2,719  which is recorded in net realized and unrealized gains (losses) on the Company’s consolidated statement of income. The following provides an analysis of realized and unrealized gains and losses for the three and six months ended June 30, 2010 and 2009:
 
For the Three Months Ended June 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 5,488     $ (1,619 )   $ 3,869  
Trading securities
    522       (1,137 )     (615 )
Other investments
                 
Net realized gains
    6,010       (2,756 )     3,254  
Unrealized loss on short sales
          (2,719 )     (2,719 )
Net realized and unrealized gains
  $ 6,010     $ (5,475 )   $ 535  

For the Six Months Ended June 30, 2010
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 5,800     $ (1,619 )   $ 4,181  
Trading securities
    522       (1,137 )     (615 )
Other investments
                 
Net realized gains
    6,322       (2,756 )     3,566  
Unrealized loss on short sales
          (2,719 )     (2,719 )
Net realized and unrealized gains
  $ 6,322     $ (5,475 )   $ 847  

For the Three Months Ended June 30, 2009
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 2,143     $ (609 )   $ 1,534  
Other investments
                 
Net realized gains
  $ 2,143     $ (609 )   $ 1,534  

For the Six Months Ended June 30, 2009
 
Gross Gains
   
Gross losses
   
Net
 
Available-for-sale securities
  $ 3,898     $ (4,279 )   $ (381 )
Other investments
          (15 )     (15 )
Net realized losses
  $ 3,898     $ (4,294 )   $ (396 )

 
11

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
3.
Investments (continued)
 
Proceeds from sales of fixed maturities classified as available for sale were $173,687 and $134,384 for the six months ended June 30, 2010 and 2009, respectively.
 
Net unrealized gain (loss) on available-for-sale investments was as follows:
 
   
June 30, 
2010
   
June 30, 
2009
 
Fixed maturities
  $ 57,613     $ (12,287 )
Other investments
    (124 )     (422 )
Total net unrealized gain (loss)
    57,489       (12,709 )
Deferred income tax expense
          (2,388 )
Net unrealized losses, net of deferred income tax
  $ 57,489     $ (15,097 )
Change in unrealized gain (loss), net of deferred income tax
  $ 24,742     $ 29,402  
 
(c)
Restricted Cash and Investments
 
We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trust as collateral are primarily cash and highly rated fixed maturity securities. The fair value of our restricted assets was as follows:
 
   
June 30, 
2010
   
December 31, 
2009
 
Restricted cash – third party agreements
  $ 115,746     $ 133,029  
Restricted cash – related party agreements
    52,347       11,485  
Restricted cash – U.S. state regulatory authorities
    303       430  
Total restricted cash
    168,396       144,944  
Restricted investments – in Trust for third party agreements at fair value (Amortized cost: 2010 – $856,511; 2009 – $1,011,582)
    887,632       1,022,337  
Restricted investments – in Trust for related party agreements at fair value (Amortized cost: 2010 – $226,558; 2009 – $177,537)
    250,465       195,474  
Restricted investments – in Trust for U.S. state regulatory authorities (Amortized cost: 2010 – $13,280; 2009 – $13,032)
    13,707       12,867  
Total restricted investments
    1,151,804       1,230,678  
Total restricted cash and investments
  $ 1,320,200     $ 1,375,622  
 
(d)
Other
 
The Company enters into repurchase agreements. The agreements are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities, that it invests or holds in short term or fixed income securities. As of June 30, 2010, there were $70,972 principal amount outstanding at interest rate of 0.27%. Interest expense associated with these repurchase agreements was $298 and $355 for the three and six months ended June 30, 2010, respectively (2009 - $10 and $783, respectively), out of which $262 was accrued as of June 30, 2010 (December 31, 2009 - $33). The Company has approximately $70,972 of collateral pledged in support of these agreements.
 
Securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices.  The Company’s liability for securities to be delivered is measured at their fair value and as of June 30, 2010 were $52,328 for a US Treasury bond.  This amount is included in accrued expenses and other liabilities in the condensed consolidated balance sheets. These transactions result in off-balance sheet risk, as the Company’s ultimate cost to satisfy the delivery of securities sold but not yet purchased may exceed the amount reflected at June 30, 2010.  Collateral of an equivalent amount has been pledged to the clearing broker.
 
 
12

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
4.
Fair Value of Financial Instruments
 
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:
 
 
·
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
 
 
·
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
 
 
·
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
 
In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
 
ASC 825, “Disclosure about Fair Value of Financial Instruments,” requires all entities to disclose the fair value of their financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value.
 
The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of June 30, 2010.
 
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 and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are 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 option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of U.S. government agencies securities in Level 2.
 
Corporate debt: Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. These securities are generally priced by pricing services. The pricing services typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. The Company generally classifies the fair values of its corporate securities in Level 2.
 
Municipals: Municipal securities comprise bonds issued by U.S. domiciled state and municipality entities. The fair values of these securities are generally priced by pricing services. The pricing services typically use is determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.
 
Other investments: The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.
 
 
13

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
4.
Fair Value of Financial Instruments (continued)
 
Reinsurance balance receivable. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value due to short term nature of the assets.
 
Loan to related party. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.
 
Junior subordinated debt. The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.
 
(a)
Fair Value Hierarchy
 
The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of June 30, 2010 and December 31, 2009:
 
As at June 30, 2010
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value
 
Assets
                       
Fixed maturities
                       
U.S. treasury bonds
  $ 59,397     $     $     $ 59,397  
U.S. agency bonds – mortgage and asset-backed
          732,866             732,866  
U.S. agency bonds – other
          155,691             155,691  
Corporate fixed maturities
          663,825             663,825  
Municipal bonds
          22,127             22,127  
Other investments
                5,677       5,677  
Total
  $ 59,397     $ 1,574,509     $ 5,677     $ 1,639,583  
As a percentage of total assets
    2.1 %     55.5 %     0.2 %     57.8 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $ 70,972     $     $ 70,972  
Securities sold but not yet purchased
          52,328             52,328  
    $     $ 123,300     $     $ 123,300  
As a percentage of total liabilities
          5.8 %           5.8 %
 
As at December 31, 2009
 
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
  $ 39,238     $     $     $ 39,238  
U.S. agency bonds – mortgage and asset-backed
          794,583             794,583  
U.S. agency bonds – other
          221,517             221,517  
Corporate fixed maturities
          582,664             582,664  
Municipal bonds
          23,690             23,690  
Other investments
                5,549       5,549  
Total
  $ 39,238     $ 1,622,454     $ 5,549     $ 1,667,241  
As a percentage of total assets
    1.5 %     61.5 %     0.2 %     63.2 %
Liabilities
                               
Securities sold under agreements to repurchase
  $     $ 95,401     $     $ 95,401  
As a percentage of total liabilities
          4.9 %           4.9 %

 
14

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
4.
Fair Value of Financial Instruments (continued)
 
(b)
Level 3 Financial Instruments
 
The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis for the three and six months ended June 30, 2010 and 2009:
 
 
Three Months
Ended
June 30, 2010
   
Three Months
Ended
June 30, 2009
 
Balance at beginning of period
  $ 5,601     $ 5,386  
Net realized and unrealized gains – included in net income
           
Net realized and unrealized losses – included in net income
           
Change in net unrealized gains – included in other comprehensive income (loss)
           
Change in net unrealized losses – included in other comprehensive income (loss)
    (44 )     112  
Purchases
    123        
Sales and redemptions
    (3 )     (106 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 5,677     $ 5,392  
                 
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  
 
Other Investments:
 
Six Months
Ended
June 30, 2010
   
Six Months
Ended
June 30, 2009
 
Balance at beginning of period
  $ 5,549     $ 5,291  
Net realized and unrealized gains – included in net income
           
Net realized and unrealized losses – included in net income
          (15 )
Change in net unrealized gains – included in other comprehensive income (loss)
           
Change in net unrealized losses – included in other comprehensive income (loss)
    11       106  
Purchases
    123       138  
Sales and redemptions
    (6 )     (128 )
Transfers into Level 3
           
Transfers out of Level 3
           
Balance at end of period
  $ 5,677     $ 5,392  
                 
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date
  $     $  
 
5.
Goodwill and Intangible Assets
 
Goodwill
 
Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. The Company performs an annual impairment analysis to identify potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized. This annual test is performed during the fourth quarter of each year or more frequently if events or circumstances change in a way that requires the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing requires an evaluation of the estimated fair value of each reporting unit to its carrying value, including the goodwill. An impairment charge is recorded if the estimated fair value is less than the carrying amount of the reporting unit. No impairments have been identified to date.
 
Intangibles
 
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks. Insurance company licenses are considered indefinite life intangible assets subject to annual impairment testing.
 
The following table shows an analysis of goodwill and intangible assets as of June 30, 2010 and December 31, 2009:
 
 
15

 
 
MAIDEN HOLDINGS, LTD.

Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
5.
Goodwill and Intangible Assets (continued)
 
As at June 30, 2010
 
Gross
   
Accumulated
Amortization
   
Net
 
Useful Life
Goodwill
  $ 52,617     $     $ 52,617  
Indefinite
State licenses
    7,727             7,727  
Indefinite
Customer relationships
    51,400       (10,747 )     40,653  
15 years double declining
Net balance
  $ 111,744     $ (10,747 )   $ 100,997    
 
As at December 31, 2009
 
Gross
   
Accumulated
Amortization
   
Net
 
Useful Life
Goodwill
  $ 52,617     $     $ 52,617  
Indefinite
State licenses
    7,727             7,727  
Indefinite
Customer relationships
    51,400       (7,843 )     43,557  
15 years double declining
Net balance
  $ 111,744     $ (7,843 )   $ 103,901    
 
The goodwill and intangible assets were recognized in 2009 and 2008 as a result of the GMAC Acquisition and are assigned to Diversified Reinsurance segment. Goodwill and intangible assets are subject to annual impairment testing. No impairment was recorded during the three and six months ended June 30, 2010. The estimated amortization expense for the next five years is:
 
   
June 30,
2010
 
2010
  $ 2,904  
2011
    5,033  
2012
    4,362  
2013
    3,781  
2014
    3,276  
 
6.
Junior Subordinated Debt
 
On January 20, 2009, the Company completed a private placement of 260,000 units (the “Units” or the “TRUPS Offering”), each Unit consisting of $1,000 principal amount of capital securities (the “Trust Preferred Securities”) of Maiden Capital Financing Trust (the “Trust”), a special purpose trust established by Maiden Holdings North America, Ltd. ("Maiden NA"), and 45 common shares, $0.01 par value, of the Company (the “Common Shares”), for a purchase price of $1,000.45 per Unit. We also issued 11,700,000 common shares to the purchasers in the TRUPS Offering. This resulted in gross proceeds to the Company of $260,117, before $4,342 of placement agent fees and expenses. Certain trusts established by Michael Karfunkel and George Karfunkel, two of the Company’s founding shareholders, purchased an aggregate of 159,000 of the Units or 61.12%. The remaining 101,000 Units were purchased by existing institutional shareholders of the Company.
 
The Trust used the proceeds from the sale of the Trust Preferred Securities to purchase a subordinated debenture (the “Debenture”) in the principal amount of $260,000 issued by Maiden NA.
 
Under the terms of the Trust Preferred Securities, the Company can repay the principal balance in full or in part at any time. However, if the Company repays such principal within five years of the date of issuance, it is required to pay an additional amount equal to one full year of interest on the amount of Trust Preferred Securities repaid. If the full amount of the Trust Preferred Securities were repaid within five years of the date of issuance, the additional amount due would be $36,400, which would be a reduction in earnings.
 
Pursuant to separate Guarantee Agreements dated as of January 20, 2009 with Wilmington Trust Company, as guarantee trustee, each of the Company and Maiden NA has agreed to guarantee the payment of distributions and payments on liquidation or redemption of the Trust Preferred Securities.
 
 
16

 

MAIDEN HOLDINGS, LTD.

Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
6.
Junior Subordinated Debt (continued)
 
As a consequence of the issuance of a majority of the Units to a related party under, ASC Topic 810 “Consolidation”, the Trust is a variable interest entity and the Company is deemed not to be the Primary beneficiary of the Trust and therefore it is not consolidated. The issuance of common shares associated with the Trust Preferred Securities resulted in an original issuance discount of $44,928 based on market price of $3.85 on January 20, 2009. The discount is amortized over 30 years based on the effective interest method. The Debentures and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%.
 
As of June 30, 2010, the stated value of the Trust Preferred Securities was $215,156 which comprises the principal amount of $260,000 and unamortized discount of $44,844. Amortization expense for the three and six months ended June 30, 2010 was $16 and $31, respectively (2009 - $12 and $24, respectively).
 
7.
Earnings Per Share
 
The following is a summary of the elements used in calculating basic and diluted earnings per share: 
 
   
Three Months
Ended
June 30, 2010
   
Three Months
Ended 
June 30, 2009
   
Six Months
Ended 
June 30, 2010
   
Six Months
Ended 
June 30, 2009
 
Net income available to common shareholders
  $ 18,637     $ 16,251     $ 32,206     $ 29,352  
                                 
Weighted average number of common shares outstanding – basic
    70,291,894       70,287,664       70,291,650       68,994,846  
Potentially dilutive securities:
                               
Warrants
                       
Share options
    478,955       379,435       482,114       315,858  
Weighted average number of common shares outstanding – diluted
    70,770,849       70,667,099       70,773,764       69,310,704  
                                 
Basic earnings per common share:
  $ 0.27     $ 0.23     $ 0.46     $ 0.43  
Diluted earnings per common share:
  $ 0.26     $ 0.23     $ 0.46     $ 0.42  
 
As of June 30, 2010, 4,050,000 (2009 4,050,000) warrants and 1,689,874 (2009 645,626) share options were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
 
8.
Share Based Compensation
 
Share Options
 
The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all share option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The adoption of ASC Topic 718 "Compensation - Stock Compensation" fair value method has resulted in share-based expense (a component of salaries and benefits) in the amount of approximately $240 and $450 for the three and six months ended June 30, 2010, respectively (2009 – $117 and $276, respectively). 
 
The key assumptions used in determining the fair value of options granted in the three and six months ended June 30, 2010 and a summary of the methodology applied to develop each assumption are as follows:  
 
 
17

 

MAIDEN HOLDINGS, LTD.
 
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands of United States Dollars, Except Par Value and Per Share Data)
(Unaudited)
 
8.
Share Based Compensation (continued)
 
Assumptions:
 
June 30,
2010
 
Volatility
    29.8-46.0 %
Risk-free interest rate
    2.36-3.30 %
Weighted average expected lives in years
 
5-6.1 years
 
Forfeiture rate
    0 %
Dividend yield rate
    1-5.39 %
 
Expected Price Volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The common shares of Maiden Holdings, Ltd. began trading on May 6, 2008 on NASDAQ.  Since the Company does not have enough history over which to calculate an expected volatility representative of the volatility over the expected lives of the options, the Company also considered the historical and current implied volatilities of a set of comparable companies in the industry in which the Company operates.
 
Risk-Free Interest Rate – This is the U.S. treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense. 
 
Expected Lives – This is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period as historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense.
 
Forfeiture Rate – This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense.
 
The following schedules show all options granted, exercised, expired and exchanged under the Plan for the three and six months ended June 30, 2010:
 
Three Months Ended
  June 30, 2010
 
Number of
Share Options
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
 
Outstanding, March 31, 2010
    2,335,824     $ 5.98    
8.78 years
 
Granted