Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - Maiden Holdings, Ltd. | q12016exhibit-321.htm |
EX-31.2 - EXHIBIT 31.2 - Maiden Holdings, Ltd. | q12016exhibit-312.htm |
EX-32.2 - EXHIBIT 32.2 - Maiden Holdings, Ltd. | q12016exhibit322.htm |
EX-31.1 - EXHIBIT 31.1 - Maiden Holdings, Ltd. | q12016exhibit-311.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, 2016
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 x | Accelerated filer o | |
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 3, 2016, the number of the Registrant's Common Stock ($.01 par value) outstanding was 73,992,275.
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, 2016 (Unaudited) | December 31, 2015 (Audited) | ||||||
ASSETS | |||||||
Investments: | |||||||
Fixed maturities, available-for-sale, at fair value (amortized cost 2016: $3,657,447; 2015: $3,562,864) | $ | 3,705,631 | $ | 3,508,088 | |||
Fixed maturities, held-to-maturity, at amortized cost (fair value 2016: $620,327; 2015: $598,975) | 607,170 | 607,843 | |||||
Other investments, at fair value (cost 2016: $10,619; 2015: $10,816) | 13,065 | 11,812 | |||||
Total investments | 4,325,866 | 4,127,743 | |||||
Cash and cash equivalents | 85,240 | 89,641 | |||||
Restricted cash and cash equivalents | 145,501 | 242,859 | |||||
Accrued investment income | 33,775 | 32,288 | |||||
Reinsurance balances receivable, net (includes $263,751 and $147,365 from related parties in 2016 and 2015, respectively) | 598,302 | 377,318 | |||||
Reinsurance recoverable on unpaid losses (includes $1,694 and $2,177 from related parties in 2016 and 2015, respectively) | 83,515 | 71,248 | |||||
Loan to related party | 167,975 | 167,975 | |||||
Deferred commission and other acquisition expenses, net (includes $369,039 and $341,025 from related parties in 2016 and 2015, respectively) | 446,122 | 397,548 | |||||
Goodwill and intangible assets, net | 81,388 | 81,920 | |||||
Other assets | 151,989 | 115,038 | |||||
Total assets | $ | 6,119,673 | $ | 5,703,578 | |||
LIABILITIES | |||||||
Reserve for loss and loss adjustment expenses (includes $1,495,788 and $1,443,639 from related parties in 2016 and 2015, respectively) | $ | 2,572,405 | $ | 2,510,101 | |||
Unearned premiums (includes $1,165,078 and $1,077,460 from related parties in 2016 and 2015, respectively) | 1,571,350 | 1,354,572 | |||||
Accrued expenses and other liabilities | 165,616 | 139,873 | |||||
Senior notes | |||||||
Principal amount | 360,000 | 360,000 | |||||
Less unamortized debt issuance costs | 9,973 | 10,067 | |||||
Senior notes, net | 350,027 | 349,933 | |||||
Total liabilities | 4,659,398 | 4,354,479 | |||||
Commitments and Contingencies | |||||||
EQUITY | |||||||
Preference shares | 480,000 | 480,000 | |||||
Common shares ($0.01 par value: 75,042,178 and 74,735,785 shares issued in 2016 and 2015, respectively; 73,992,275 and 73,721,140 shares outstanding in 2016 and 2015, respectively) | 750 | 747 | |||||
Additional paid-in capital | 580,779 | 579,178 | |||||
Accumulated other comprehensive income (loss) | 69,470 | (23,767 | ) | ||||
Retained earnings | 333,035 | 316,184 | |||||
Treasury shares, at cost (1,049,903 and 1,014,645 shares in 2016 and 2015, respectively) | (4,991 | ) | (4,521 | ) | |||
Total Maiden shareholders’ equity | 1,459,043 | 1,347,821 | |||||
Noncontrolling interest in subsidiaries | 1,232 | 1,278 | |||||
Total equity | 1,460,275 | 1,349,099 | |||||
Total liabilities and equity | $ | 6,119,673 | $ | 5,703,578 |
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, | 2016 | 2015 | ||||||
Revenues: | ||||||||
Gross premiums written | $ | 864,114 | $ | 834,266 | ||||
Net premiums written | $ | 792,831 | $ | 796,983 | ||||
Change in unearned premiums | (176,822 | ) | (219,664 | ) | ||||
Net premiums earned | 616,009 | 577,319 | ||||||
Other insurance revenue | 4,826 | 4,979 | ||||||
Net investment income | 36,302 | 28,260 | ||||||
Net realized gains on investment | 2,277 | 869 | ||||||
Total revenues | 659,414 | 611,427 | ||||||
Expenses: | ||||||||
Net loss and loss adjustment expenses | 403,621 | 377,406 | ||||||
Commission and other acquisition expenses | 195,068 | 178,342 | ||||||
General and administrative expenses | 15,496 | 16,197 | ||||||
Interest and amortization expenses | 7,265 | 7,264 | ||||||
Amortization of intangible assets | 615 | 710 | ||||||
Foreign exchange and other gains | (267 | ) | (7,826 | ) | ||||
Total expenses | 621,798 | 572,093 | ||||||
Income before income taxes | 37,616 | 39,334 | ||||||
Income tax expense | 787 | 800 | ||||||
Net income | 36,829 | 38,534 | ||||||
Loss (income) attributable to noncontrolling interest | 64 | (45 | ) | |||||
Net income attributable to Maiden shareholders | 36,893 | 38,489 | ||||||
Dividends on preference shares | (9,677 | ) | (6,084 | ) | ||||
Net income attributable to Maiden common shareholders | $ | 27,216 | $ | 32,405 | ||||
Basic earnings per share attributable to Maiden common shareholders | $ | 0.37 | $ | 0.44 | ||||
Diluted earnings per share attributable to Maiden common shareholders | $ | 0.35 | $ | 0.41 | ||||
Dividends declared per common share | $ | 0.14 | $ | 0.13 |
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, | 2016 | 2015 | ||||||
Comprehensive income: | ||||||||
Net income | $ | 36,829 | $ | 38,534 | ||||
Other comprehensive income, before tax | ||||||||
Net unrealized holding gains (losses) on available-for-sale fixed maturities arising during the period | 103,404 | (6,941 | ) | |||||
Adjustment for reclassification of net realized losses recognized in net income | 632 | 149 | ||||||
Foreign currency translation adjustment | (10,734 | ) | 18,935 | |||||
Other comprehensive income, before tax | 93,302 | 12,143 | ||||||
Income tax (expense) benefit related to components of other comprehensive income | (36 | ) | 7 | |||||
Other comprehensive income, after tax | 93,266 | 12,150 | ||||||
Comprehensive income | 130,095 | 50,684 | ||||||
Net loss (income) attributable to noncontrolling interest | 64 | (45 | ) | |||||
Other comprehensive (income) loss attributable to noncontrolling interest | (29 | ) | 55 | |||||
Comprehensive loss attributable to noncontrolling interest | 35 | 10 | ||||||
Comprehensive income attributable to Maiden shareholders | $ | 130,130 | $ | 50,694 |
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, | 2016 | 2015 | ||||||
Preference shares | ||||||||
Beginning balance | $ | 480,000 | $ | 315,000 | ||||
Ending balance | 480,000 | 315,000 | ||||||
Common shares | ||||||||
Beginning balance | 747 | 739 | ||||||
Exercise of options and issuance of shares | 3 | 5 | ||||||
Ending balance | 750 | 744 | ||||||
Additional paid-in capital | ||||||||
Beginning balance | 579,178 | 578,445 | ||||||
Exercise of options and issuance of common shares | 345 | 1,316 | ||||||
Share-based compensation expense | 1,256 | 716 | ||||||
Ending balance | 580,779 | 580,477 | ||||||
Accumulated other comprehensive income | ||||||||
Beginning balance | (23,767 | ) | 95,293 | |||||
Change in net unrealized gains (losses) on investments, net of reclassification adjustment and deferred income tax expense | 104,000 | (6,785 | ) | |||||
Foreign currency translation adjustments | (10,763 | ) | 18,990 | |||||
Ending balance | 69,470 | 107,498 | ||||||
Retained earnings | ||||||||
Beginning balance | 316,184 | 255,084 | ||||||
Net income attributable to Maiden shareholders | 36,893 | 38,489 | ||||||
Dividends on preference shares | (9,677 | ) | (6,084 | ) | ||||
Dividends on common shares | (10,365 | ) | (9,551 | ) | ||||
Ending balance | 333,035 | 277,938 | ||||||
Treasury shares | ||||||||
Beginning balance | (4,521 | ) | (3,867 | ) | ||||
Shares repurchased for treasury | (470 | ) | (654 | ) | ||||
Ending balance | (4,991 | ) | (4,521 | ) | ||||
Noncontrolling interest in subsidiaries | ||||||||
Beginning balance | 1,278 | 472 | ||||||
Dividend paid to noncontrolling interest | (11 | ) | (13 | ) | ||||
(Loss) income attributable to noncontrolling interest | (64 | ) | 45 | |||||
Foreign currency translation adjustments | 29 | (55 | ) | |||||
Ending balance | 1,232 | 449 | ||||||
Total equity | $ | 1,460,275 | $ | 1,277,585 |
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, | 2016 | 2015 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 36,829 | $ | 38,534 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,780 | 4,000 | ||||||
Net realized gains on investment | (2,277 | ) | (869 | ) | ||||
Foreign exchange and other gains | (267 | ) | (7,826 | ) | ||||
Changes in assets – (increase) decrease: | ||||||||
Reinsurance balances receivable, net | (218,880 | ) | (131,943 | ) | ||||
Reinsurance recoverable on unpaid losses | (12,392 | ) | (3,471 | ) | ||||
Accrued investment income | (1,373 | ) | 1,390 | |||||
Deferred commission and other acquisition expenses | (44,002 | ) | (59,701 | ) | ||||
Other assets | (35,609 | ) | (20,898 | ) | ||||
Changes in liabilities – increase (decrease): | ||||||||
Reserve for loss and loss adjustment expenses | 54,846 | 95,458 | ||||||
Unearned premiums | 203,281 | 237,879 | ||||||
Accrued expenses and other liabilities | 24,068 | 17,856 | ||||||
Net cash provided by operating activities | 9,004 | 170,409 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of fixed maturities – available-for-sale | (268,661 | ) | (115,992 | ) | ||||
Purchases of other investments | (46 | ) | (97 | ) | ||||
Proceeds from sales of fixed maturities – available-for-sale | 67,837 | 56,639 | ||||||
Proceeds from maturities and calls of fixed maturities | 106,168 | 158,078 | ||||||
Proceeds from redemption of other investments | 307 | 29 | ||||||
Decrease (increase) in restricted cash and cash equivalents, net | 97,701 | (191,903 | ) | |||||
Other, net | (178 | ) | (240 | ) | ||||
Net cash provided by (used in) investing activities | 3,128 | (93,486 | ) | |||||
Cash flows from financing activities: | ||||||||
Common share issuance | 348 | 1,321 | ||||||
Repurchase of common shares | (470 | ) | (654 | ) | ||||
Dividends paid to common shareholders | (10,328 | ) | (9,492 | ) | ||||
Dividends paid to preference shareholders | (9,677 | ) | (6,084 | ) | ||||
Net cash used in financing activities | (20,127 | ) | (14,909 | ) | ||||
Effect of exchange rate changes on foreign currency cash | 3,594 | (2,012 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (4,401 | ) | 60,002 | |||||
Cash and cash equivalents, beginning of period | 89,641 | 108,119 | ||||||
Cash and cash equivalents, end of period | $ | 85,240 | $ | 168,121 |
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, 2015.
Certain reclassifications have been made for 2015 to conform to the 2016 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, 2015 with the exception of the following:
Transition related to Accounting Standards Update ("ASU") No. 2015-03: Simplifying the Presentation of Debt Issuance Costs
Effective January 1, 2016, the Company adopted the new guidance under ASU 2015-03 which requires that debt issuance costs be presented as a direct deduction from the related debt liability rather than as an asset in the balance sheet. The amortization of such costs is reported as an interest expense. The Company applied this new guidance retrospectively to all prior periods presented. The adoption of this new guidance reduced the December 31, 2015 audited consolidated total assets and total liabilities by $10,067, respectively, representing the amount of unamortized issuance costs related to our Senior Notes which was previously presented as part of other assets. There was no impact on the net income, related per-share amounts or the retained earnings for the periods affected by the adoption of this guidance.
Recently Issued Accounting Standards Not Yet Adopted
Disclosures about Short-Duration Contracts
In May 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-09 which is aimed at providing users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims. The new disclosures are required for short-duration insurance contracts issued by insurers. For public business entities, this guidance will be effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted and should be applied retrospectively by providing comparative disclosures for each period presented. As this guidance is disclosure-related only, the adoption of this guidance is not expected to have a material impact on the Company’s statements of operations and financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01 that will change how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. It does not change the guidance for classifying and measuring investments in debt securities and loans. Under the new guidance, entities will have to measure many equity investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. This includes investments in partnerships, unincorporated joint ventures and limited liability companies that do not result in consolidation and are not accounted for under the equity method. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify today as available for sale ("AFS") in AOCI. They also will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of this new guidance on its consolidated results of operations and financial condition.
8
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
2. Significant Accounting Policies (continued)
Accounting for Leases
In February 2016, the FASB issued final Accounting Standards Codification ("ASC") 842 guidance that requires lessees to put most leases on their balance sheets but recognize expenses on their income statement in a manner similar to today's accounting. The guidance also eliminates today's real-estate-specific provisions for all entities. All entities classify leases to determine how to recognize lease-related revenue and expense. The U.S. GAAP standard is effective for public business entities and certain not-for-profit entities and employee benefit plans for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company is evaluating the impact of this new guidance on its consolidated results of operations and financial condition.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09 guidance that outlines changes for certain aspects of share-based payments to employees, such as accounting for forfeitures, which applies to the Company. Under the new guidance, the entities can elect to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance is effective for public business entities for fiscal year beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities, in any annual or interim period for which financial statements haven't been issued or made available for issuance, but all of the guidance must be adopted in the same period. 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. Our Diversified Reinsurance segment consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located, primarily in the U.S. and Europe. Our AmTrust Reinsurance segment includes all business ceded to Maiden Reinsurance Ltd. ("Maiden Bermuda") from AmTrust Financial Services, Inc. ("AmTrust"), primarily the AmTrust Quota Share and the European Hospital Liability Quota Share. Please refer to "Note 6. Related Party Transactions" for additional information. In addition to our reportable segments, the results of operations of the former NGHC Quota Share segment and the remnants of the U.S. excess and surplus business have been included in the "Other" category.
The Company evaluates segment performance based on segment profit separately from the results of our investment portfolio. General and administrative expenses are allocated to the segments 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. All remaining assets are allocated to Corporate.
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:
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, 2016 | Diversified Reinsurance | AmTrust Reinsurance | Other | Total | ||||||||||||
Gross premiums written | $ | 315,804 | $ | 548,310 | $ | — | $ | 864,114 | ||||||||
Net premiums written | $ | 286,136 | $ | 506,695 | $ | — | $ | 792,831 | ||||||||
Net premiums earned | $ | 172,256 | $ | 443,753 | $ | — | $ | 616,009 | ||||||||
Other insurance revenue | 4,826 | — | — | 4,826 | ||||||||||||
Net loss and loss adjustment expenses ("LAE") | (119,076 | ) | (281,774 | ) | (2,771 | ) | (403,621 | ) | ||||||||
Commission and other acquisition expenses | (54,531 | ) | (140,538 | ) | 1 | (195,068 | ) | |||||||||
General and administrative expenses | (8,600 | ) | (586 | ) | — | (9,186 | ) | |||||||||
Underwriting income (loss) | $ | (5,125 | ) | $ | 20,855 | $ | (2,770 | ) | $ | 12,960 | ||||||
Reconciliation to net income | ||||||||||||||||
Net investment income and realized gains on investment | 38,579 | |||||||||||||||
Interest and amortization expenses | (7,265 | ) | ||||||||||||||
Amortization of intangible assets | (615 | ) | ||||||||||||||
Foreign exchange and other gains | 267 | |||||||||||||||
Other general and administrative expenses | (6,310 | ) | ||||||||||||||
Income tax expense | (787 | ) | ||||||||||||||
Net income | $ | 36,829 | ||||||||||||||
Net loss and LAE ratio (1) | 67.2 | % | 63.5 | % | 65.0 | % | ||||||||||
Commission and other acquisition expense ratio (2) | 30.8 | % | 31.7 | % | 31.4 | % | ||||||||||
General and administrative expense ratio (3) | 4.9 | % | 0.1 | % | 2.5 | % | ||||||||||
Combined ratio (4) | 102.9 | % | 95.3 | % | 98.9 | % |
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)
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 LAE | (132,386 | ) | (243,094 | ) | (1,926 | ) | (377,406 | ) | ||||||||
Commission and other acquisition expenses | (58,206 | ) | (120,136 | ) | — | (178,342 | ) | |||||||||
General and administrative expenses | (9,320 | ) | (747 | ) | — | (10,067 | ) | |||||||||
Underwriting income (loss) | $ | (2,249 | ) | $ | 20,656 | $ | (1,924 | ) | $ | 16,483 | ||||||
Reconciliation to net income | ||||||||||||||||
Net investment income and realized gains on investment | 29,129 | |||||||||||||||
Interest and amortization expenses | (7,264 | ) | ||||||||||||||
Amortization of intangible assets | (710 | ) | ||||||||||||||
Foreign exchange and other gains | 7,826 | |||||||||||||||
Other general and administrative expenses | (6,130 | ) | ||||||||||||||
Income tax expense | (800 | ) | ||||||||||||||
Net income | $ | 38,534 | ||||||||||||||
Net loss and LAE 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) | 4.7 | % | 0.2 | % | 2.8 | % | ||||||||||
Combined ratio (4) | 101.1 | % | 94.6 | % | 98.2 | % |
(1) Calculated by dividing net loss and LAE 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 LAE ratio, commission and other acquisition expense ratio and general and administrative expense ratio. |
The following tables summarize the total assets of our reportable segments including the reconciliation to our consolidated assets at March 31, 2016 and December 31, 2015:
March 31, 2016 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,803,795 | $ | 3,491,418 | $ | 5,295,213 | ||||||
Corporate assets | — | — | 824,460 | |||||||||
Total Assets | $ | 1,803,795 | $ | 3,491,418 | $ | 6,119,673 |
December 31, 2015 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,644,541 | $ | 3,178,859 | $ | 4,823,400 | ||||||
Corporate assets | — | — | 880,178 | |||||||||
Total Assets | $ | 1,644,541 | $ | 3,178,859 | $ | 5,703,578 |
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)
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, 2016 and 2015:
For the Three Months Ended March 31, | 2016 | 2015 | ||||||||||||
Net premiums written | Total | % of Total | Total | % of Total | ||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 61,869 | 7.8 | % | $ | 68,514 | 8.6 | % | ||||||
Casualty | 155,280 | 19.6 | % | 171,531 | 21.5 | % | ||||||||
Accident and Health | 39,572 | 5.0 | % | 30,107 | 3.8 | % | ||||||||
International | 29,415 | 3.7 | % | 24,046 | 3.0 | % | ||||||||
Total Diversified Reinsurance | 286,136 | 36.1 | % | 294,198 | 36.9 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 362,499 | 45.7 | % | 323,201 | 40.5 | % | ||||||||
Specialty Program | 76,791 | 9.7 | % | 74,580 | 9.4 | % | ||||||||
Specialty Risk and Extended Warranty | 67,405 | 8.5 | % | 105,003 | 13.2 | % | ||||||||
Total AmTrust Reinsurance | 506,695 | 63.9 | % | 502,784 | 63.1 | % | ||||||||
Other | — | — | % | 1 | — | % | ||||||||
$ | 792,831 | 100.0 | % | $ | 796,983 | 100.0 | % |
For the Three Months Ended March 31, | 2016 | 2015 | ||||||||||||
Net premiums earned | Total | % of Total | Total | % of Total | ||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 32,710 | 5.3 | % | $ | 40,623 | 7.0 | % | ||||||
Casualty | 100,166 | 16.3 | % | 118,938 | 20.6 | % | ||||||||
Accident and Health | 17,804 | 2.9 | % | 12,201 | 2.1 | % | ||||||||
International | 21,576 | 3.5 | % | 20,922 | 3.6 | % | ||||||||
Total Diversified Reinsurance | 172,256 | 28.0 | % | 192,684 | 33.3 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 264,491 | 42.9 | % | 224,991 | 39.0 | % | ||||||||
Specialty Program | 84,199 | 13.7 | % | 57,010 | 9.9 | % | ||||||||
Specialty Risk and Extended Warranty | 95,063 | 15.4 | % | 102,632 | 17.8 | % | ||||||||
Total AmTrust Reinsurance | 443,753 | 72.0 | % | 384,633 | 66.7 | % | ||||||||
Other | — | — | % | 2 | — | % | ||||||||
$ | 616,009 | 100.0 | % | $ | 577,319 | 100.0 | % |
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
(a) Fixed Maturities and Other Investments
The original or amortized cost, estimated fair value and gross unrealized gains and losses of investment in fixed maturities and other investments as of March 31, 2016 and December 31, 2015 are as follows:
March 31, 2016 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
AFS fixed maturities: | ||||||||||||||||
U.S. treasury bonds | $ | 5,715 | $ | 365 | $ | (27 | ) | $ | 6,053 | |||||||
U.S. agency bonds – mortgage-backed | 1,461,303 | 33,451 | (2,600 | ) | 1,492,154 | |||||||||||
U.S. agency bonds – other | 34,032 | 525 | — | 34,557 | ||||||||||||
Non-U.S. government and supranational bonds | 36,185 | 265 | (2,962 | ) | 33,488 | |||||||||||
Asset-backed securities | 173,894 | 4,742 | (1,149 | ) | 177,487 | |||||||||||
Corporate bonds | 1,884,135 | 65,767 | (54,374 | ) | 1,895,528 | |||||||||||
Municipal bonds | 62,183 | 4,181 | — | 66,364 | ||||||||||||
Total AFS fixed maturities | 3,657,447 | 109,296 | (61,112 | ) | 3,705,631 | |||||||||||
HTM fixed maturities: | ||||||||||||||||
Corporate bonds | 607,170 | 19,310 | (6,153 | ) | 620,327 | |||||||||||
Total HTM fixed maturities | 607,170 | 19,310 | (6,153 | ) | 620,327 | |||||||||||
Other investments | 10,619 | 2,446 | — | 13,065 | ||||||||||||
Total investments | $ | 4,275,236 | $ | 131,052 | $ | (67,265 | ) | $ | 4,339,023 |
December 31, 2015 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
AFS fixed maturities: | ||||||||||||||||
U.S. treasury bonds | $ | 5,714 | $ | 312 | $ | (16 | ) | $ | 6,010 | |||||||
U.S. agency bonds – mortgage-backed | 1,471,782 | 15,399 | (10,190 | ) | 1,476,991 | |||||||||||
U.S. agency bonds – other | 23,734 | 577 | — | 24,311 | ||||||||||||
Non-U.S. government and supranational bonds | 35,128 | — | (4,584 | ) | 30,544 | |||||||||||
Asset-backed securities | 165,719 | 1,174 | (1,089 | ) | 165,804 | |||||||||||
Corporate bonds | 1,798,610 | 38,070 | (97,012 | ) | 1,739,668 | |||||||||||
Municipal bonds | 62,177 | 2,583 | — | 64,760 | ||||||||||||
Total AFS fixed maturities | 3,562,864 | 58,115 | (112,891 | ) | 3,508,088 | |||||||||||
HTM fixed maturities: | ||||||||||||||||
Corporate bonds | 607,843 | 3,458 | (12,326 | ) | 598,975 | |||||||||||
Total HTM fixed maturities | 607,843 | 3,458 | (12,326 | ) | 598,975 | |||||||||||
Other investments | 10,816 | 1,091 | (95 | ) | 11,812 | |||||||||||
Total investments | $ | 4,181,523 | $ | 62,664 | $ | (125,312 | ) | $ | 4,118,875 |
During the third quarter of 2015, we designated fixed maturities with a total fair value of $608,722 as HTM reflecting our intent to hold these securities to maturity. The net unrealized holding gain of $244 at the designation date continues to be reported in the carrying value of the HTM securities and is amortized through Other Comprehensive Income over the remaining life of the securities using the effective interest method in a manner consistent with the amortization of any premium or discount.
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.
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)
AFS fixed maturities | HTM fixed maturities | |||||||||||||||
March 31, 2016 | Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
Maturity | ||||||||||||||||
Due in one year or less | $ | 190,369 | $ | 189,390 | $ | — | $ | — | ||||||||
Due after one year through five years | 467,505 | 473,535 | 102,001 | 102,567 | ||||||||||||
Due after five years through ten years | 1,326,518 | 1,332,587 | 505,169 | 517,760 | ||||||||||||
Due after ten years | 37,858 | 40,478 | — | — | ||||||||||||
2,022,250 | 2,035,990 | 607,170 | 620,327 | |||||||||||||
U.S. agency bonds – mortgage-backed | 1,461,303 | 1,492,154 | — | — | ||||||||||||
Asset-backed securities | 173,894 | 177,487 | — | — | ||||||||||||
Total fixed maturities | $ | 3,657,447 | $ | 3,705,631 | $ | 607,170 | $ | 620,327 |
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, 2016 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||
U.S. treasury bonds | $ | 1,106 | $ | (27 | ) | $ | — | $ | — | $ | 1,106 | $ | (27 | ) | ||||||||||
U.S. agency bonds – mortgage-backed | 2,141 | (6 | ) | 145,087 | (2,594 | ) | 147,228 | (2,600 | ) | |||||||||||||||
Non–U.S. government and supranational bonds | 947 | (53 | ) | 28,464 | (2,909 | ) | 29,411 | (2,962 | ) | |||||||||||||||
Asset-backed securities | 40,630 | (1,149 | ) | — | — | 40,630 | (1,149 | ) | ||||||||||||||||
Corporate bonds | 232,453 | (15,687 | ) | 438,728 | (44,840 | ) | 671,181 | (60,527 | ) | |||||||||||||||
Total temporarily impaired fixed maturities | 277,277 | (16,922 | ) | 612,279 | (50,343 | ) | 889,556 | (67,265 | ) |
As of March 31, 2016, there were approximately 168 securities in an unrealized loss position with a fair value of $889,556 and unrealized losses of $67,265. Of these securities, there are 98 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $612,279 and unrealized losses of $50,343.
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
December 31, 2015 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||
U.S treasury bonds | $ | 1,119 | $ | (16 | ) | $ | — | $ | — | $ | 1,119 | $ | (16 | ) | ||||||||||
U.S. agency bonds – mortgage-backed | 443,331 | (4,113 | ) | 170,053 | (6,077 | ) | 613,384 | (10,190 | ) | |||||||||||||||
Non–U.S. government and supranational bonds | 6,958 | (365 | ) | 22,586 | (4,219 | ) | 29,544 | (4,584 | ) | |||||||||||||||
Asset-backed securities | 89,838 | (1,089 | ) | — | — | 89,838 | (1,089 | ) | ||||||||||||||||
Corporate bonds | 752,911 | (41,352 | ) | 399,779 | (67,986 | ) | 1,152,690 | (109,338 | ) | |||||||||||||||
Total temporarily impaired fixed maturities | $ | 1,294,157 | $ | (46,935 | ) | $ | 592,418 | $ | (78,282 | ) | $ | 1,886,575 | $ | (125,217 | ) | |||||||||
Other investments | 4,905 | (95 | ) | — | — | 4,905 | (95 | ) | ||||||||||||||||
Total temporarily impaired fixed maturities and other investments | $ | 1,299,062 | $ | (47,030 | ) | $ | 592,418 | $ | (78,282 | ) | $ | 1,891,480 | $ | (125,312 | ) |
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)
As of December 31, 2015, there were approximately 270 securities in an unrealized loss position with a fair value of $1,891,480 and unrealized losses of $125,312. Of these securities, there are 93 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $592,418 and unrealized losses of $78,282.
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, 2016, 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, 2016. For the three months ended March 31, 2016 and 2015, the Company recognized no OTTI.
The following summarizes the credit ratings of our fixed maturities:
Ratings* as of March 31, 2016 | Amortized cost | Fair value | % of Total fair value | ||||||||
Fixed maturities | |||||||||||
U.S. treasury bonds | $ | 5,715 | $ | 6,053 | 0.1 | % | |||||
U.S. agency bonds | 1,495,335 | 1,526,711 | 35.3 | % | |||||||
AAA | 167,508 | 174,635 | 4.0 | % | |||||||
AA+, AA, AA- | 234,347 | 243,111 | 5.6 | % | |||||||
A+, A, A- | 1,236,029 | 1,266,768 | 29.3 | % | |||||||
BBB+, BBB, BBB- | 963,115 | 967,726 | 22.4 | % | |||||||
BB+ or lower | 162,568 | 140,954 | 3.3 | % | |||||||
Total | $ | 4,264,617 | $ | 4,325,958 | 100.0 | % |
Ratings* as of December 31, 2015 | Amortized cost | Fair value | % of Total fair value | ||||||||
Fixed maturities | |||||||||||
U.S. treasury bonds | $ | 5,714 | $ | 6,010 | 0.1 | % | |||||
U.S. agency bonds | 1,495,516 | 1,501,302 | 36.6 | % | |||||||
AAA | 170,190 | 170,391 | 4.1 | % | |||||||
AA+, AA, AA- | 222,506 | 223,084 | 5.4 | % | |||||||
A+, A, A- | 1,075,550 | 1,066,794 | 26.0 | % | |||||||
BBB+, BBB, BBB- | 1,077,064 | 1,039,228 | 25.3 | % | |||||||
BB+ or lower | 124,167 | 100,254 | 2.5 | % | |||||||
Total | $ | 4,170,707 | $ | 4,107,063 | 100.0 | % |
*Based on Standard & Poor’s ("S&P"), or equivalent, ratings
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)
(b) Other Investments
The table below shows our portfolio of other investments:
March 31, 2016 | December 31, 2015 | |||||||||||||
Fair value | % of Total fair value | Fair value | % of Total fair value | |||||||||||
Investment in quoted equity | $ | 6,300 | 48.2 | % | $ | 4,905 | 41.5 | % | ||||||
Investments in limited partnerships | 5,765 | 44.1 | % | 5,907 | 50.0 | % | ||||||||
Other | 1,000 | 7.7 | % | 1,000 | 8.5 | % | ||||||||
Total other investments | $ | 13,065 | 100.0 | % | $ | 11,812 | 100.0 | % |
The Company has an unfunded commitment on its investments in limited partnerships of approximately $593 at March 31, 2016.
(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, 2016 | Gross gains | Gross losses | Net | |||||||||
AFS fixed maturities | $ | 3,093 | $ | (879 | ) | $ | 2,214 | |||||
Other investments | 63 | — | 63 | |||||||||
Net realized gains on investment | $ | 3,156 | $ | (879 | ) | $ | 2,277 |
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 |
Proceeds from sales of AFS fixed maturities were $67,837 for the three months ended March 31, 2016 (March 31, 2015 - $56,639). Net unrealized gains were as follows:
March 31, 2016 | December 31, 2015 | |||||||
Fixed maturities | $ | 47,564 | $ | (55,024 | ) | |||
Other investments | 2,446 | 996 | ||||||
Total net unrealized gain (loss) | 50,010 | (54,028 | ) | |||||
Deferred income tax expense | (122 | ) | (84 | ) | ||||
Net unrealized gains, net of deferred income tax | $ | 49,888 | $ | (54,112 | ) | |||
Change in net unrealized gains, net of deferred income tax | $ | 104,000 |
(d) Restricted Cash and Cash Equivalents and Investments
We are required to maintain assets to serve as collateral for our reinsurance liabilities under various reinsurance agreements. 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:
16
MAIDEN HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands of U.S. dollars, except share and per share data)
4. Investments (continued)
March 31, 2016 | December 31, 2015 | |||||||
Restricted cash and cash equivalents – third party agreements | $ | 48,672 | $ | 102,837 | ||||
Restricted cash and cash equivalents – related party agreements | 96,758 | 139,944 | ||||||
Restricted cash and cash equivalents – U.S. state regulatory authorities | 71 | 78 | ||||||
Total restricted cash and cash equivalents | 145,501 | 242,859 | ||||||
Restricted investments AFS – in trust for third party agreements at fair value (Amortized cost: 2016 – $1,113,166; 2015 – $1,081,202) | 1,130,246 | 1,067,602 | ||||||
Restricted investments AFS – in trust for related party agreements at fair value (Amortized cost: 2016 – $1,911,358; 2015 – $1,781,178) | 1,937,527 | 1,754,705 | ||||||
Restricted investments HTM – in trust for related party agreements at fair value (Amortized cost: 2016 – $607,170; 2015 – $607,843) | 620,327 | 598,975 | ||||||
Restricted investments AFS – in trust for U.S. state regulatory authorities (Amortized cost: 2016 – $4,077; 2015 – $4,071) | 4,345 | 4,303 | ||||||
Total restricted investments | 3,692,445 | 3,425,585 | ||||||
Total restricted cash and cash equivalents and investments | $ | 3,837,946 | $ | 3,668,444 |
5. Fair Value of Financial Instruments
(a) Fair Values of Financial Instruments
FASB ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820") defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between open market participants at the measurement date. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• | Level 1 — Valuations based on unadjusted quoted market prices for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities and U.S. Treasury bonds; |
• | 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; commercial mortgage-backed securities ("CMBS"); collateralized loan obligations ("CLO"); corporate and municipal bonds; 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 at 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
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)
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, 2016.
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.
Asset-backed securities — These securities comprise CMBS and CLO originated by a variety of financial institutions that on acquisition are rated BBB-/Baa3 or higher. 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 and CLO are observable market inputs, the fair value of the CMBS and CLO 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 spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Municipal bonds — 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.
Other investments — Includes both quoted and unquoted investments. The fair value of our quoted equity investment is obtained from the Pricing Service 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 balances 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.
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)
(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, 2016 | 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 | $ | 6,053 | $ | — | $ | — | $ | 6,053 | ||||||||
U.S. agency bonds – mortgage-backed | — | 1,492,154 | — | 1,492,154 | ||||||||||||
U.S. agency bonds – other | — | 34,557 | — | 34,557 | ||||||||||||
Non-U.S. government and supranational bonds | — | 33,488 | — | 33,488 | ||||||||||||
Asset-backed securities | — | 177,487 | — | 177,487 | ||||||||||||
Corporate bonds | — | 1,895,528 | — | 1,895,528 | ||||||||||||
Municipal bonds | — | 66,364 | — | 66,364 | ||||||||||||
Other investments | 6,300 | — | 6,765 | 13,065 | ||||||||||||
Total | $ | 12,353 | $ | 3,699,578 | $ | 6,765 | $ | 3,718,696 | ||||||||
As a percentage of total assets | 0.2 | % | 60.5 | % | 0.1 | % | 60.8 | % |
December 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 | $ | 6,010 | $ | — | $ |