Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Maiden Holdings, Ltd. | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Maiden Holdings, Ltd. | q12015exhibit-312.htm |
EX-32.1 - EXHIBIT 32.1 - Maiden Holdings, Ltd. | q12015exhibit-321.htm |
EX-31.1 - EXHIBIT 31.1 - Maiden Holdings, Ltd. | q12015exhibit-311.htm |
EX-32.2 - EXHIBIT 32.2 - Maiden Holdings, Ltd. | q12015-exhibit322.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 March 31, 2015
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 (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 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 x 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 May 4, 2015, the number of the Registrant's Common Stock ($.01 par value) outstanding was 73,456,213.
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, 2015 (Unaudited) | December 31, 2014 (Audited) | ||||||
ASSETS | |||||||
Investments: | |||||||
Fixed maturities, available-for-sale, at fair value (Amortized cost 2015: $3,279,749; 2014: $3,379,864) | $ | 3,350,932 | $ | 3,456,904 | |||
Other investments, at fair value (Cost 2015: $10,955; 2014: $10,862) | 11,730 | 12,571 | |||||
Total investments | 3,362,662 | 3,469,475 | |||||
Cash and cash equivalents | 168,121 | 108,119 | |||||
Restricted cash and cash equivalents | 473,066 | 284,381 | |||||
Accrued investment income | 25,791 | 27,524 | |||||
Reinsurance balances receivable, net (includes $312,349 and $267,490 from related parties in 2015 and 2014, respectively) | 636,230 | 512,996 | |||||
Reinsurance recoverable on unpaid losses (includes $3,492 and $3,845 from related parties in 2015 and 2014, respectively) | 79,271 | 75,873 | |||||
Loan to related party | 167,975 | 167,975 | |||||
Deferred commission and other acquisition expenses, net (includes $330,303 and $285,227 from related parties in 2015 and 2014, respectively) | 430,871 | 372,487 | |||||
Goodwill and intangible assets, net | 86,626 | 87,336 | |||||
Other assets | 76,727 | 57,926 | |||||
Total assets | $ | 5,507,340 | $ | 5,164,092 | |||
LIABILITIES | |||||||
Reserve for loss and loss adjustment expenses (includes $1,218,533 and $1,163,195 from related parties in 2015 and 2014, respectively) | $ | 2,331,508 | $ | 2,271,292 | |||
Unearned premiums (includes $1,047,190 and $913,986 from related parties in 2015 and 2014, respectively) | 1,437,492 | 1,207,757 | |||||
Accrued expenses and other liabilities | 100,755 | 83,877 | |||||
Senior notes | 360,000 | 360,000 | |||||
Total liabilities | 4,229,755 | 3,922,926 | |||||
Commitments and Contingencies | |||||||
EQUITY | |||||||
Preference shares | 315,000 | 315,000 | |||||
Common shares ($0.01 par value; 74,424,539 and 73,900,889 shares issued in 2015 and 2014, respectively; 73,409,894 and 72,932,702 shares outstanding in 2015 and 2014, respectively) | 744 | 739 | |||||
Additional paid-in capital | 580,477 | 578,445 | |||||
Accumulated other comprehensive income | 107,498 | 95,293 | |||||
Retained earnings | 277,938 | 255,084 | |||||
Treasury shares, at cost (1,014,645 and 968,187 shares in 2015 and 2014, respectively) | (4,521 | ) | (3,867 | ) | |||
Total Maiden shareholders’ equity | 1,277,136 | 1,240,694 | |||||
Noncontrolling interest in subsidiaries | 449 | 472 | |||||
Total equity | 1,277,585 | 1,241,166 | |||||
Total liabilities and equity | $ | 5,507,340 | $ | 5,164,092 |
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, | 2015 | 2014 | ||||||
Revenues: | ||||||||
Gross premiums written | $ | 834,266 | $ | 722,382 | ||||
Net premiums written | $ | 796,983 | $ | 709,892 | ||||
Change in unearned premiums | (219,664 | ) | (190,662 | ) | ||||
Net premiums earned | 577,319 | 519,230 | ||||||
Other insurance revenue | 4,979 | 5,162 | ||||||
Net investment income | 28,260 | 27,842 | ||||||
Net realized gains on investment | 869 | 88 | ||||||
Total revenues | 611,427 | 552,322 | ||||||
Expenses: | ||||||||
Net loss and loss adjustment expenses | 377,406 | 351,344 | ||||||
Commission and other acquisition expenses | 178,342 | 146,082 | ||||||
General and administrative expenses | 16,289 | 14,924 | ||||||
Interest and amortization expenses | 7,172 | 8,064 | ||||||
Accelerated amortization of Junior Subordinated Debt discount and issuance cost | — | 28,240 | ||||||
Amortization of intangible assets | 710 | 819 | ||||||
Foreign exchange gains | (7,826 | ) | (138 | ) | ||||
Total expenses | 572,093 | 549,335 | ||||||
Income before income taxes | 39,334 | 2,987 | ||||||
Income tax expense | 800 | 926 | ||||||
Net income | 38,534 | 2,061 | ||||||
Less: Income attributable to noncontrolling interest | (45 | ) | (39 | ) | ||||
Net income attributable to Maiden shareholders | 38,489 | 2,022 | ||||||
Dividends on preference shares | (6,084 | ) | (6,084 | ) | ||||
Net income (loss) attributable to Maiden common shareholders | $ | 32,405 | $ | (4,062 | ) | |||
Basic earnings (loss) per share attributable to Maiden common shareholders | $ | 0.44 | $ | (0.06 | ) | |||
Diluted earnings (loss) per share attributable to Maiden common shareholders | $ | 0.41 | $ | (0.06 | ) | |||
Dividends declared per common share | $ | 0.13 | $ | 0.11 |
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, | 2015 | 2014 | |||||||
Comprehensive income: | |||||||||
Net income | $ | 38,534 | $ | 2,061 | |||||
Other comprehensive income | |||||||||
Net unrealized holding (losses) gains on available-for-sale fixed maturities arising during the period (net of tax of $7 for the three months ended March 31, 2015 and $(29) for the three months ended March 31, 2014, respectively) | (6,934 | ) | 38,031 | ||||||
Adjustment for reclassification of net realized losses (gains) recognized in net income, net of tax | 149 | (71 | ) | ||||||
Foreign currency translation adjustment | 18,935 | (166 | ) | ||||||
Other comprehensive income | 12,150 | 37,794 | |||||||
Comprehensive income | 50,684 | 39,855 | |||||||
Net income attributable to noncontrolling interest | (45 | ) | (39 | ) | |||||
Other comprehensive loss attributable to noncontrolling interest | 55 | — | |||||||
Comprehensive loss (income) attributable to noncontrolling interest | 10 | (39 | ) | ||||||
Comprehensive income attributable to Maiden shareholders | $ | 50,694 | $ | 39,816 |
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, | 2015 | 2014 | ||||||
Preference shares | ||||||||
Beginning balance | $ | 315,000 | $ | 315,000 | ||||
Ending balance | 315,000 | 315,000 | ||||||
Common shares | ||||||||
Beginning balance | 739 | 736 | ||||||
Exercise of options and issuance of shares | 5 | 2 | ||||||
Ending balance | 744 | 738 | ||||||
Additional paid-in capital | ||||||||
Beginning balance | 578,445 | 574,522 | ||||||
Exercise of options and issuance of common shares | 1,316 | 182 | ||||||
Share based compensation expense | 716 | 497 | ||||||
Ending balance | 580,477 | 575,201 | ||||||
Accumulated other comprehensive income | ||||||||
Beginning balance | 95,293 | 25,784 | ||||||
Change in net unrealized (losses) gains on investments, net of reclassification adjustment and deferred income tax expense | (6,785 | ) | 37,960 | |||||
Foreign currency translation adjustments | 18,990 | (166 | ) | |||||
Ending balance | 107,498 | 63,578 | ||||||
Retained earnings | ||||||||
Beginning balance | 255,084 | 211,602 | ||||||
Net income attributable to Maiden shareholders | 38,489 | 2,022 | ||||||
Dividends on preference shares | (6,084 | ) | (6,084 | ) | ||||
Dividends on common shares | (9,551 | ) | (8,034 | ) | ||||
Ending balance | 277,938 | 199,506 | ||||||
Treasury shares | ||||||||
Beginning balance | (3,867 | ) | (3,801 | ) | ||||
Shares repurchased for treasury | (654 | ) | (66 | ) | ||||
Ending balance | (4,521 | ) | (3,867 | ) | ||||
Noncontrolling interest in subsidiaries | ||||||||
Beginning balance | 472 | 452 | ||||||
Dividend paid to noncontrolling interest | (13 | ) | (15 | ) | ||||
Net income attributable to noncontrolling interest | 45 | 39 | ||||||
Foreign currency translation adjustments | (55 | ) | — | |||||
Ending balance | 449 | 476 | ||||||
Total equity | $ | 1,277,585 | $ | 1,150,632 |
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, | 2015 | 2014 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 38,534 | $ | 2,061 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of intangibles | 1,051 | 1,190 | ||||||
Net realized gains on investment | (869 | ) | (88 | ) | ||||
Foreign exchange gains | (7,826 | ) | (138 | ) | ||||
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 | 2,949 | 30,201 | ||||||
Changes in assets – (increase) decrease: | ||||||||
Reinsurance balances receivable, net | (131,943 | ) | (114,814 | ) | ||||
Reinsurance recoverable on unpaid losses | (3,471 | ) | 710 | |||||
Accrued investment income | 1,390 | (17 | ) | |||||
Deferred commission and other acquisition expenses | (59,701 | ) | (43,676 | ) | ||||
Other assets | (20,898 | ) | 13,194 | |||||
Changes in liabilities – increase (decrease): | ||||||||
Reserve for loss and loss adjustment expenses | 95,458 | 77,580 | ||||||
Unearned premiums | 237,879 | 183,339 | ||||||
Accrued expenses and other liabilities | 17,202 | (5,852 | ) | |||||
Net cash provided by operating activities | 169,755 | 143,690 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of fixed maturities – available-for-sale | (115,992 | ) | (152,969 | ) | ||||
Purchases of other investments | (97 | ) | (787 | ) | ||||
Proceeds from sales of fixed maturities – available-for-sale | 56,639 | 105,334 | ||||||
Proceeds from maturities and calls of fixed maturities | 158,078 | 77,292 | ||||||
Proceeds from redemption of other investments | 29 | 313 | ||||||
Increase in restricted cash and cash equivalents | (191,903 | ) | (73,852 | ) | ||||
Other, net | (240 | ) | (624 | ) | ||||
Net cash used in investing activities | (93,486 | ) | (45,293 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayment of Junior Subordinated Debt | — | (152,500 | ) | |||||
Common share issuance | 1,321 | 184 | ||||||
Dividends paid to common shareholders | (9,492 | ) | (8,000 | ) | ||||
Dividends paid to preference shareholders | (6,084 | ) | (6,084 | ) | ||||
Net cash used in financing activities | (14,255 | ) | (166,400 | ) | ||||
Effect of exchange rate changes on foreign currency cash | (2,012 | ) | 208 | |||||
Net increase (decrease) in cash and cash equivalents | 60,002 | (67,795 | ) | |||||
Cash and cash equivalents, beginning of period | 108,119 | 139,833 | ||||||
Cash and cash equivalents, end of period | $ | 168,121 | $ | 72,038 |
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.
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, 2014.
Certain reclassifications have been made for 2014 to conform to the 2015 presentation and have no impact on net income and total equity 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, 2014.
Recently Issued Accounting Standards Not Yet Adopted
Simplifying the Presentation of Debt Issuance Costs
On April 7, 2015 the Financial Accounting Standards Board ("FSAB") issued Accounting Standards Update ("ASU") 2015- 03 which changes the presentation of debt issuance costs in financial statements. Under this new guidance, the Company will be required to present such cost in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The amortization of such costs shall be reported as an interest expense. For public business entities, this final guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2015. Early adoption is permitted and the Company will be required to apply this new guidance retrospectively to all prior periods presented. The Company will also be required, in the year of adoption (and in interim periods within that year) to provide certain disclosures about the change in accounting principle, including the nature of and reason for the change, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial line items (that is, debt issuance cost asset and the debt liability). The Company is evaluating the impact of this new guidance on its consolidated results of operations and financial condition.
3. Segment Reporting
The Company currently has two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. Refer to "Business - Our Reportable Segments" section included under Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2014 for a detailed discussion about these segments.
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 reportable segment, the Company identifies those assets that are attributable to a particular segment such as reinsurance balances receivable, reinsurance recoverable on unpaid losses, deferred commission and other acquisition expenses, loans, goodwill and intangible assets, restricted cash and cash equivalents and investments, and prepaid reinsurance premiums, reinsurance recoverable on paid losses and funds withheld (which are presented as part of other assets in the unaudited Condensed Consolidated Balance Sheets). All remaining assets are allocated to Corporate.
Fee-generating business is considered part of the underwriting operations of the Company and is reported as "Other insurance revenue" in the unaudited Condensed Consolidated Statements of Income. To the extent that these fees are generated from underlying insurance contracts sold to third parties that are subsequently ceded under quota share reinsurance contracts to Maiden Reinsurance Ltd. ("Maiden Bermuda"), a proportionate share of the fee is offset against the related acquisition expense.
8
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
3. Segment Reporting (continued)
The following tables summarize our reporting segment's underwriting results and the reconciliation of our reportable segments and Other category's underwriting results to our consolidated net income:
For the Three Months Ended March 31, 2015 | Diversified Reinsurance | AmTrust Reinsurance | Other | Total | ||||||||||||
Gross premiums written | $ | 305,341 | $ | 528,926 | $ | (1 | ) | $ | 834,266 | |||||||
Net premiums written | $ | 294,198 | $ | 502,784 | $ | 1 | $ | 796,983 | ||||||||
Net premiums earned | $ | 192,684 | $ | 384,633 | $ | 2 | $ | 577,319 | ||||||||
Other insurance revenue | 4,979 | — | — | 4,979 | ||||||||||||
Net loss and loss adjustment expenses | (132,386 | ) | (243,094 | ) | (1,926 | ) | (377,406 | ) | ||||||||
Commission and other acquisition expenses | (58,206 | ) | (120,136 | ) | — | (178,342 | ) | |||||||||
General and administrative expenses | (9,413 | ) | (747 | ) | — | (10,160 | ) | |||||||||
Underwriting (loss) income | $ | (2,342 | ) | $ | 20,656 | $ | (1,924 | ) | $ | 16,390 | ||||||
Reconciliation to net income | ||||||||||||||||
Net investment income and realized gains on investment | 29,129 | |||||||||||||||
Interest and amortization expenses | (7,172 | ) | ||||||||||||||
Amortization of intangible assets | (710 | ) | ||||||||||||||
Foreign exchange gains | 7,826 | |||||||||||||||
Other general and administrative expenses | (6,129 | ) | ||||||||||||||
Income tax expense | (800 | ) | ||||||||||||||
Net income | $ | 38,534 | ||||||||||||||
Net loss and loss adjustment expense ratio(1) | 67.0 | % | 63.2 | % | 64.8 | % | ||||||||||
Commission and other acquisition expense ratio(2) | 29.4 | % | 31.2 | % | 30.6 | % | ||||||||||
General and administrative expense ratio(3) | 4.8 | % | 0.2 | % | 2.8 | % | ||||||||||
Combined ratio(4) | 101.2 | % | 94.6 | % | 98.2 | % |
9
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
3. Segment Reporting (continued)
For the Three Months Ended March 31, 2014 | Diversified Reinsurance | AmTrust Reinsurance | Other | Total | ||||||||||||
Gross premiums written | $ | 304,187 | $ | 419,010 | $ | (815 | ) | $ | 722,382 | |||||||
Net premiums written | $ | 291,640 | $ | 419,010 | $ | (758 | ) | $ | 709,892 | |||||||
Net premiums earned | $ | 199,547 | $ | 304,922 | $ | 14,761 | $ | 519,230 | ||||||||
Other insurance revenue | 5,162 | — | — | 5,162 | ||||||||||||
Net loss and loss adjustment expenses | (138,663 | ) | (200,413 | ) | (12,268 | ) | (351,344 | ) | ||||||||
Commission and other acquisition expenses | (51,214 | ) | (90,485 | ) | (4,383 | ) | (146,082 | ) | ||||||||
General and administrative expenses | (9,876 | ) | (499 | ) | (199 | ) | (10,574 | ) | ||||||||
Underwriting income (loss) | $ | 4,956 | $ | 13,525 | $ | (2,089 | ) | $ | 16,392 | |||||||
Reconciliation to net income | ||||||||||||||||
Net investment income and realized gains on investment | 27,930 | |||||||||||||||
Interest and amortization expenses | (8,064 | ) | ||||||||||||||
Accelerated amortization of Junior Subordinated Debt discount and issuance cost | (28,240 | ) | ||||||||||||||
Amortization of intangible assets | (819 | ) | ||||||||||||||
Foreign exchange gains | 138 | |||||||||||||||
Other general and administrative expenses | (4,350 | ) | ||||||||||||||
Income tax expense | (926 | ) | ||||||||||||||
Net income | $ | 2,061 | ||||||||||||||
Net loss and loss adjustment expense ratio(1) | 67.7 | % | 65.7 | % | 67.0 | % | ||||||||||
Commission and other acquisition expense ratio(2) | 25.0 | % | 29.7 | % | 27.9 | % | ||||||||||
General and administrative expense ratio(3) | 4.9 | % | 0.2 | % | 2.8 | % | ||||||||||
Combined ratio(4) | 97.6 | % | 95.6 | % | 97.7 | % |
(1) Calculated by dividing net loss and loss adjustment expenses by net premiums earned and other insurance revenue. | ||||||||
(2) Calculated by dividing commission and other acquisition expenses by net premiums earned and other insurance revenue. | ||||||||
(3) Calculated by dividing general and administrative expenses by net premiums earned and other insurance revenue. | ||||||||
(4) Calculated by adding together the net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio. |
10
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
3. Segment Reporting (continued)
The following tables summarize the total assets of our reportable segments including the reconciliation to our consolidated assets at March 31, 2015 and December 31, 2014:
March 31, 2015 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,746,552 | $ | 2,911,618 | $ | 4,658,170 | ||||||
Corporate assets | — | — | 849,170 | |||||||||
Total Assets | $ | 1,746,552 | $ | 2,911,618 | $ | 5,507,340 |
December 31, 2014 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,624,664 | $ | 2,640,488 | $ | 4,265,152 | ||||||
Corporate assets | — | — | 898,940 | |||||||||
Total Assets | $ | 1,624,664 | $ | 2,640,488 | $ | 5,164,092 |
The following tables set forth financial information relating to net premiums written and earned by major line of business and reportable segment for the three months ended March 31, 2015 and 2014:
For the Three Months Ended March 31, | 2015 | 2014 | ||||||||||||
Net premiums written | Total | % of Total | Total | % of Total | ||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 68,514 | 8.6 | % | $ | 62,602 | 8.8 | % | ||||||
Casualty | 171,531 | 21.5 | % | 171,754 | 24.3 | % | ||||||||
Accident and Health | 30,107 | 3.8 | % | 17,222 | 2.4 | % | ||||||||
International | 24,046 | 3.0 | % | 40,062 | 5.6 | % | ||||||||
Total Diversified Reinsurance | 294,198 | 36.9 | % | 291,640 | 41.1 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 323,201 | 40.5 | % | 253,757 | 35.7 | % | ||||||||
Specialty Program | 74,580 | 9.4 | % | 31,798 | 4.5 | % | ||||||||
Specialty Risk and Extended Warranty | 105,003 | 13.2 | % | 133,455 | 18.8 | % | ||||||||
Total AmTrust Reinsurance | 502,784 | 63.1 | % | 419,010 | 59.0 | % | ||||||||
Other | 1 | — | % | (758 | ) | (0.1 | )% | |||||||
$ | 796,983 | 100.0 | % | $ | 709,892 | 100.0 | % |
11
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
3. Segment Reporting (continued)
For the Three Months Ended March 31, | 2015 | 2014 | ||||||||||||
Net premiums earned | Total | % of Total | Total | % of Total | ||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 40,623 | 7.0 | % | $ | 40,826 | 7.9 | % | ||||||
Casualty | 118,938 | 20.6 | % | 121,887 | 23.5 | % | ||||||||
Accident and Health | 12,201 | 2.1 | % | 8,886 | 1.7 | % | ||||||||
International | 20,922 | 3.6 | % | 27,948 | 5.4 | % | ||||||||
Total Diversified Reinsurance | 192,684 | 33.3 | % | 199,547 | 38.5 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 224,991 | 39.0 | % | 158,605 | 30.5 | % | ||||||||
Specialty Program | 57,010 | 9.9 | % | 32,853 | 6.3 | % | ||||||||
Specialty Risk and Extended Warranty | 102,632 | 17.8 | % | 113,464 | 21.9 | % | ||||||||
Total AmTrust Reinsurance | 384,633 | 66.7 | % | 304,922 | 58.7 | % | ||||||||
Other | 2 | — | % | 14,761 | 2.8 | % | ||||||||
$ | 577,319 | 100.0 | % | $ | 519,230 | 100.0 | % |
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 ("AFS") fixed maturities and other investments as of March 31, 2015 and December 31, 2014 are as follows:
March 31, 2015 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
AFS fixed maturities: | ||||||||||||||||
U.S. treasury bonds | $ | 8,938 | $ | 492 | $ | — | $ | 9,430 | ||||||||
U.S. agency bonds – mortgage-backed | 1,151,287 | 25,560 | (4,285 | ) | 1,172,562 | |||||||||||
U.S. agency bonds – other | 7,214 | 756 | — | 7,970 | ||||||||||||
Non-U.S. government and supranational bonds | 40,109 | — | (5,352 | ) | 34,757 | |||||||||||
Commercial mortgage-backed securities | 96,997 | 3,659 | — | 100,656 | ||||||||||||
Corporate bonds | 1,865,540 | 95,398 | (49,822 | ) | 1,911,116 | |||||||||||
Municipal bonds | 62,159 | 4,777 | — | 66,936 | ||||||||||||
Short-term investments | 47,505 | — | — | 47,505 | ||||||||||||
Total AFS fixed maturities | 3,279,749 | 130,642 | (59,459 | ) | 3,350,932 | |||||||||||
Other investments | 10,955 | 800 | (25 | ) | 11,730 | |||||||||||
Total investments | $ | 3,290,704 | $ | 131,442 | $ | (59,484 | ) | $ | 3,362,662 |
12
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)
December 31, 2014 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
AFS fixed maturities: | ||||||||||||||||
U.S. treasury bonds | $ | 8,937 | $ | 423 | $ | — | $ | 9,360 | ||||||||
U.S. agency bonds – mortgage-backed | 1,313,834 | 19,197 | (10,588 | ) | 1,322,443 | |||||||||||
U.S. agency bonds – other | 7,213 | 775 | — | 7,988 | ||||||||||||
Non-U.S. government and supranational bonds | 54,467 | 304 | (3,128 | ) | 51,643 | |||||||||||
Commercial mortgage-backed securities | 52,337 | 2,443 | — | 54,780 | ||||||||||||
Corporate bonds | 1,831,431 | 89,243 | (25,295 | ) | 1,895,379 | |||||||||||
Municipal bonds | 62,153 | 3,666 | — | 65,819 | ||||||||||||
Short-term investments | 49,492 | — | — | 49,492 | ||||||||||||
Total AFS fixed maturities | 3,379,864 | 116,051 | (39,011 | ) | 3,456,904 | |||||||||||
Other investments | 10,862 | 1,709 | — | 12,571 | ||||||||||||
Total investments | $ | 3,390,726 | $ | 117,760 | $ | (39,011 | ) | $ | 3,469,475 |
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.
March 31, 2015 | Amortized cost | Fair value | % of Total fair value | ||||||||
Maturity | |||||||||||
Due in one year or less | $ | 70,797 | $ | 69,576 | 2.1 | % | |||||
Due after one year through five years | 593,546 | 620,145 | 18.5 | % | |||||||
Due after five years through ten years | 1,328,216 | 1,344,974 | 40.1 | % | |||||||
Due after ten years | 38,906 | 43,019 | 1.3 | % | |||||||
2,031,465 | 2,077,714 | 62.0 | % | ||||||||
U.S. agency bonds – mortgage-backed | 1,151,287 | 1,172,562 | 35.0 | % | |||||||
Commercial mortgage-backed securities | 96,997 | 100,656 | 3.0 | % | |||||||
Total AFS fixed maturities | $ | 3,279,749 | $ | 3,350,932 | 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, 2015 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
AFS fixed maturities | ||||||||||||||||||||||||
U.S. agency bonds – mortgage-backed | $ | 52,898 | $ | (203 | ) | $ | 200,388 | $ | (4,082 | ) | $ | 253,286 | $ | (4,285 | ) | |||||||||
Non–U.S. government and supranational bonds | 32,052 | (4,843 | ) | 2,705 | (509 | ) | 34,757 | (5,352 | ) | |||||||||||||||
Corporate bonds | 442,101 | (40,111 | ) | 134,841 | (9,711 | ) | 576,942 | (49,822 | ) | |||||||||||||||
Total temporarily impaired AFS fixed maturities | 527,051 | (45,157 | ) | 337,934 | (14,302 | ) | 864,985 | (59,459 | ) | |||||||||||||||
Other investments | 4,975 | (25 | ) | — | — | 4,975 | (25 | ) | ||||||||||||||||
Total | $ | 532,026 | $ | (45,182 | ) | $ | 337,934 | $ | (14,302 | ) | $ | 869,960 | $ | (59,484 | ) |
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 (continued)
As of March 31, 2015, there were approximately 138 securities in an unrealized loss position with a fair value of $869,960 and unrealized losses of $59,484. Of these securities, there are 35 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $337,934 and unrealized losses of $14,302.
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
December 31, 2014 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
AFS fixed maturities | ||||||||||||||||||||||||
U.S. agency bonds – mortgage-backed | $ | 84,264 | $ | (806 | ) | $ | 441,601 | $ | (9,782 | ) | $ | 525,865 | $ | (10,588 | ) | |||||||||
Non–U.S. government and supranational bonds | 43,712 | (2,822 | ) | 2,522 | (306 | ) | 46,234 | (3,128 | ) | |||||||||||||||
Corporate bonds | 397,173 | (14,485 | ) | 143,894 | (10,810 | ) | 541,067 | (25,295 | ) | |||||||||||||||
Total temporarily impaired AFS fixed maturities | $ | 525,149 | $ | (18,113 | ) | $ | 588,017 | $ | (20,898 | ) | $ | 1,113,166 | $ | (39,011 | ) |
As of December 31, 2014, there were approximately 141 securities in an unrealized loss position with a fair value of $1,113,166 and unrealized losses of $39,011. Of these securities, there are 46 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $588,017 and unrealized losses of $20,898.
Other-Than-Temporary Impairments ("OTTI")
The Company performs quarterly reviews of its investment portfolio in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance. At March 31, 2015, we have determined that the unrealized losses on fixed maturities 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 do so 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, 2015. For the three months ended March 31, 2015 and March 31, 2014, the Company recognized no OTTI.
The following summarizes the credit ratings of our AFS fixed maturities:
Ratings* as of March 31, 2015 | Amortized cost | Fair value | % of Total fair value | ||||||||
U.S. treasury bonds | $ | 8,938 | $ | 9,430 | 0.3 | % | |||||
U.S. agency bonds | 1,158,501 | 1,180,532 | 35.2 | % | |||||||
AAA | 179,127 | 183,789 | 5.5 | % | |||||||
AA+, AA, AA- | 161,985 | 163,430 | 4.9 | % | |||||||
A+, A, A- | 834,585 | 856,875 | 25.6 | % | |||||||
BBB+, BBB, BBB- | 853,382 | 877,694 | 26.2 | % | |||||||
BB+ or lower | 83,231 | 79,182 | 2.3 | % | |||||||
Total | $ | 3,279,749 | $ | 3,350,932 | 100.0 | % |
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)
Ratings* as of December 31, 2014 | Amortized cost | Fair value | % of Total fair value | ||||||||
U.S. treasury bonds | $ | 8,937 | $ | 9,360 | 0.3 | % | |||||
U.S. agency bonds | 1,321,047 | 1,330,431 | 38.5 | % | |||||||
AAA | 193,280 | 202,973 | 5.9 | % | |||||||
AA+, AA, AA- | 116,936 | 120,679 | 3.5 | % | |||||||
A+, A, A- | 883,092 | 917,544 | 26.5 | % | |||||||
BBB+, BBB, BBB- | 794,244 | 814,039 | 23.5 | % | |||||||
BB+ or lower | 62,328 | 61,878 | 1.8 | % | |||||||
Total | $ | 3,379,864 | $ | 3,456,904 | 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, 2015 | December 31, 2014 | |||||||||||||
Fair value | % of Total fair value | Fair value | % of Total fair value | |||||||||||
Investments in limited partnerships | $ | 5,755 | 49.1 | % | $ | 5,581 | 44.4 | % | ||||||
Investment in quoted equity | 4,975 | 42.4 | % | 5,990 | 47.6 | % | ||||||||
Other | 1,000 | 8.5 | % | 1,000 | 8.0 | % | ||||||||
Total other investments | $ | 11,730 | 100.0 | % | $ | 12,571 | 100.0 | % |
The Company has an unfunded commitment on its investments in limited partnerships of approximately $643 at March 31, 2015.
(c) 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 unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014:
For the Three Months Ended March 31, 2015 | Gross gains | Gross losses | Net | |||||||||
AFS fixed maturities | $ | 845 | $ | — | $ | 845 | ||||||
Other investments | 24 | — | 24 | |||||||||
Net realized gains on investment | $ | 869 | $ | — | $ | 869 |
For the Three Months Ended March 31, 2014 | Gross gains | Gross losses | Net | |||||||||
AFS fixed maturities | $ | 1 | $ | — | $ | 1 | ||||||
Other investments | $ | 87 | $ | — | $ | 87 | ||||||
Net realized losses on investment | $ | 88 | $ | — | $ | 88 |
Proceeds from sales of AFS fixed maturities were $56,639 for the three months ended March 31, 2015 (March 31, 2014 - $105,334).
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)
Net unrealized gains were as follows:
March 31, 2015 | December 31, 2014 | |||||||
AFS fixed maturities | $ | 71,183 | $ | 77,040 | ||||
Other investments | 775 | 1,709 | ||||||
Total net unrealized gains | 71,958 | 78,749 | ||||||
Deferred income tax expense | (164 | ) | (170 | ) | ||||
Net unrealized gains, net of deferred income tax | $ | 71,794 | $ | 78,579 | ||||
Change in net unrealized gains, net of deferred income tax | $ | (6,785 | ) | $ | 43,851 |
(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. We also utilize trust accounts to collateralize business with our reinsurance counterparties. The assets in trust as collateral are primarily cash and highly rated AFS fixed maturity securities. These trust accounts generally take the place of letter of credit requirements.
The fair value of our restricted assets was as follows:
March 31, 2015 | December 31, 2014 | |||||||
Restricted cash and cash equivalents – third party agreements | $ | 77,695 | $ | 107,884 | ||||
Restricted cash and cash equivalents – related party agreements | 394,869 | 175,817 | ||||||
Restricted cash and cash equivalents – U.S. state regulatory authorities | 502 | 680 | ||||||
Total restricted cash and cash equivalents | 473,066 | 284,381 | ||||||
Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2015 – $1,040,802; 2014 – $993,974) | 1,067,119 | 1,014,878 | ||||||
Restricted investments – in trust for related party agreements at fair value (Amortized cost: 2015 – $1,716,457; 2014 – $1,769,083) | 1,753,041 | 1,814,478 | ||||||
Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2015 – $7,276; 2014 – $7,269) | 7,676 | 7,606 | ||||||
Total restricted investments | 2,827,836 | 2,836,962 | ||||||
Total restricted cash and cash equivalents and investments | $ | 3,300,902 | $ | 3,121,343 |
5. Fair Value of Financial Instruments
(a) Fair Values of Financial Instruments
FASB Accounting Standards Codification ("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 bonds, and listed derivatives that are actively traded; |
16
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)
• | 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: U.S. government-sponsored agency securities; non-U.S. government and supranational obligations; corporate and municipal bonds; commercial mortgage-backed securities; 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; and hedge and credit funds with partial transparency. |
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. The Company receives the quoted market prices from a third party nationally recognized pricing service provider ("the 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 Company will challenge any prices for its investments which are considered not to be representation of fair value. 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. The Company determines whether the fair value estimate is in the Level 2 or Level 3 hierarchy depending on the level of observable inputs available when estimating the fair value. The Company bases its estimates of fair values for assets on the bid price as it represents what a third party market participant would be willing to pay in an orderly transaction.
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 at March 31, 2015.
U.S. government and U.S. government agencies — 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 bonds 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 bonds 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 and supranational bonds — These securities are generally priced by independent pricing services. The Pricing Service 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 and supranational bonds are observable market inputs, the fair values of non-U.S. government and supranational bonds are included in the Level 2 fair value hierarchy.
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 — Bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by independent pricing services. The fair values of corporate bonds are priced, by the pricing services 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.
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 (continued)
Municipal bonds — Bonds issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds are generally priced by independent 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.
Short-term investments — Primarily commercial paper issued by corporations, all with maturities greater than 90 days and less than one year at the date of purchase. The fair values of these short-term investments are priced by independent pricing services, using market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. As the significant inputs used to price the commercial paper securities are observable market inputs, commercial paper securities are classified within Level 2.
Other investments — Includes both quoted and unquoted investments. The fair value of our quoted equity investment is obtained from the Pricing Service, reflecting the closing price quoted for the final trading day of the period and is classified within Level 1. Unquoted other investments comprise investments in limited partnerships and an investment in preference shares of a start-up insurance producer. The fair values of the 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 condensed consolidated 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 condensed consolidated balance sheets for this financial instrument approximates its fair value.
Senior notes — The amount reported in the accompanying condensed consolidated 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.
(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.
We classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
March 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||
AFS fixed maturities | ||||||||||||||||
U.S. treasury bonds | $ | 9,430 | $ | — | $ | — | $ | 9,430 | ||||||||
U.S. agency bonds – mortgage-backed | — | 1,172,562 | — | 1,172,562 | ||||||||||||
U.S. agency bonds – other | — | 7,970 | — | 7,970 | ||||||||||||
Non-U.S. government and supranational bonds | — | 34,757 | — | 34,757 | ||||||||||||
Commercial mortgage-backed securities | — | 100,656 | — | 100,656 | ||||||||||||
Corporate bonds | — | 1,911,116 | — | 1,911,116 | ||||||||||||
Municipal bonds | — | 66,936 | — | 66,936 | ||||||||||||
Short-term investments | — | 47,505 | — | 47,505 | ||||||||||||
Other investments | 4,975 | — | 6,755 | 11,730 | ||||||||||||
Total | $ | 14,405 | $ | 3,341,502 | $ | 6,755 | $ | 3,362,662 | ||||||||
As a percentage of total assets | 0.3 | % | 60.7 | % | 0.1 | % | 61.1 | % |
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)
December 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 | ||||||||||||
AFS fixed maturities | ||||||||||||||||
U.S. treasury bonds | $ | 9,360 | $ | — | $ | — | $ | 9,360 | ||||||||
U.S. agency bonds – mortgage-backed | — | 1,322,443 | — | 1,322,443 | ||||||||||||
U.S. agency bonds – other | — | 7,988 | — | 7,988 | ||||||||||||
Non-U.S. government and supranational bonds | — | 51,643 | — | 51,643 | ||||||||||||
Commercial mortgage-backed securities | — | 54,780 | — | 54,780 | ||||||||||||
Corporate bonds | — | 1,895,379 | — | 1,895,379 | ||||||||||||
Municipal bonds | — | 65,819 | — | 65,819 | ||||||||||||
Short-term investments | — | 49,492 | — | 49,492 | ||||||||||||
Other investments | 5,990 | — | 6,581 | 12,571 | ||||||||||||
Total | $ | 15,350 | $ | 3,447,544 | $ | 6,581 | $ | 3,469,475 | ||||||||
As a percentage of total assets | 0.3 | % | 66.8 | % | 0.1 | % | 67.2 | % |
The Company utilized a Pricing Service to estimate fair value measurements for approximately 99.7% and 99.9% of its fixed maturities at March 31, 2015 and December 31, 2014, respectively. The Pricing Service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury bonds generally do not trade on a daily basis, the Pricing Service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classified as Level 2. At March 31, 2015 and December 31, 2014, 0.3% and 0.1%, respectively, of the fixed maturities are valued using the market approach. At those dates, a total of three securities and one security, respectively, or approximately $11,487 and $5,016, respectively, of Level 2 fixed maturities, were priced using a quotation from a broker and/or custodian as opposed to the Pricing Service due to lack of information available. At March 31, 2015 and December 31, 2014, we have not adjusted any pricing provided to us based on the review performed by our investment managers.
Other investments: The Company utilized a Pricing Service to estimate fair value measurement for the quoted equity investment reflecting the closing price quoted for the final trading day of the period and is included in Level 1. For the unquoted other investments, the Company has $5,755, or 0.2%, of its investment portfolio in limited partnerships where the fair value estimate is determined by the fund manager based on recent filings, operating results, balance sheet stability, growth, other business and market sector fundamentals and an investment of $1,000 in preference shares of a start-up insurance producer, the fair value of which was determined using recent private market transactions. Due to the significant unobservable inputs in these valuations, the Company includes the estimate of the fair value of the unquoted investments as Level 3.
There have not been any transfers between Level 1 and Level 2 during the periods represented by these unaudited Condensed Consolidated Financial Statements.
(c) Level 3 Financial Instruments
The Company has determined that its investments in Level 3 securities are not material to its financial position or results of operations.
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)
The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis:
For the Three Months Ended | ||||||||
Other investments: | March 31, 2015 | March 31, 2014 | ||||||
Balance at beginning of period | $ | 6,581 | $ | 5,092 | ||||
Total realized gains – included in net realized gains on investment | 24 | 87 | ||||||
Total realized losses – included in net realized gains on investment | — | — | ||||||