Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Maiden Holdings, Ltd. | q12017exhibit-322.htm |
EX-32.1 - EXHIBIT 32.1 - Maiden Holdings, Ltd. | q12017exhibit-321.htm |
EX-31.2 - EXHIBIT 31.2 - Maiden Holdings, Ltd. | q12017exhibit-312.htm |
EX-31.1 - EXHIBIT 31.1 - Maiden Holdings, Ltd. | q12017exhibit-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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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 | ||
Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 2, 2017, the number of the Registrant's Common Stock ($.01 par value) outstanding was 86,553,329.
INDEX | ||
Page | ||
PART I - Financial Information | ||
Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016 (audited) | ||
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (unaudited) | ||
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited) | ||
Condensed Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2017 and 2016 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited) | ||
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, 2017 | December 31, 2016 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Investments: | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost 2017: $3,993,941; 2016: $4,005,642) | $ | 3,967,907 | $ | 3,971,666 | ||||
Fixed maturities, held to maturity, at amortized cost (fair value 2017: $767,657; 2016: $766,135) | 750,554 | 752,212 | ||||||
Other investments, at fair value (cost 2017: $10,074; 2016: $10,057) | 13,534 | 13,060 | ||||||
Total investments | 4,731,995 | 4,736,938 | ||||||
Cash and cash equivalents | 83,537 | 45,747 | ||||||
Restricted cash and cash equivalents | 109,697 | 103,788 | ||||||
Accrued investment income | 36,179 | 36,517 | ||||||
Reinsurance balances receivable, net (includes $232,548 and $132,056 from related parties in 2017 and 2016, respectively) | 615,556 | 410,166 | ||||||
Reinsurance recoverable on unpaid losses (includes $5,084 and $5,085 from related parties in 2017 and 2016, respectively) | 108,777 | 99,936 | ||||||
Loan to related party | 167,975 | 167,975 | ||||||
Deferred commission and other acquisition expenses (includes $393,166 and $339,172 from related parties in 2017 and 2016, respectively) | 472,459 | 424,605 | ||||||
Goodwill and intangible assets, net | 77,183 | 77,715 | ||||||
Other assets | 153,601 | 148,912 | ||||||
Total assets | $ | 6,556,959 | $ | 6,252,299 | ||||
LIABILITIES | ||||||||
Reserve for loss and loss adjustment expenses (includes $1,862,125 and $1,776,784 from related parties in 2017 and 2016, respectively) | $ | 2,991,604 | $ | 2,896,496 | ||||
Unearned premiums (includes $1,225,241 and $1,152,484 from related parties in 2017 and 2016, respectively) | 1,670,884 | 1,475,506 | ||||||
Accrued expenses and other liabilities | 172,886 | 167,736 | ||||||
Senior notes - principal amount | 362,500 | 362,500 | ||||||
Less unamortized issuance costs | 11,012 | 11,091 | ||||||
Senior notes, net | 351,488 | 351,409 | ||||||
Total liabilities | 5,186,862 | 4,891,147 | ||||||
Commitments and Contingencies | ||||||||
EQUITY | ||||||||
Preference shares | 315,000 | 315,000 | ||||||
Common shares ($0.01 par value; 87,641,349 and 87,321,012 shares issued in 2017 and 2016, respectively; 86,553,324 and 86,271,109 shares outstanding in 2017 and 2016, respectively) | 876 | 873 | ||||||
Additional paid-in capital | 750,694 | 749,256 | ||||||
Accumulated other comprehensive income | 15,591 | 14,997 | ||||||
Retained earnings | 293,164 | 285,662 | ||||||
Treasury shares, at cost (1,088,025 and 1,049,903 shares in 2017 and 2016, respectively) | (5,566 | ) | (4,991 | ) | ||||
Total Maiden shareholders’ equity | 1,369,759 | 1,360,797 | ||||||
Noncontrolling interests in subsidiaries | 338 | 355 | ||||||
Total equity | 1,370,097 | 1,361,152 | ||||||
Total liabilities and equity | $ | 6,556,959 | $ | 6,252,299 |
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, | ||||||||
2017 | 2016 | |||||||
Revenues | ||||||||
Gross premiums written | $ | 923,427 | $ | 864,114 | ||||
Net premiums written | $ | 900,548 | $ | 792,831 | ||||
Change in unearned premiums | (191,064 | ) | (176,822 | ) | ||||
Net premiums earned | 709,484 | 616,009 | ||||||
Other insurance revenue | 3,781 | 4,826 | ||||||
Net investment income | 42,157 | 36,302 | ||||||
Net realized gains on investment | 885 | 2,277 | ||||||
Total revenues | 756,307 | 659,414 | ||||||
Expenses | ||||||||
Net loss and loss adjustment expenses | 480,569 | 403,621 | ||||||
Commission and other acquisition expenses | 222,029 | 195,068 | ||||||
General and administrative expenses | 17,414 | 15,496 | ||||||
Interest and amortization expenses | 6,856 | 7,265 | ||||||
Amortization of intangible assets | 533 | 615 | ||||||
Foreign exchange losses (gains) | 1,921 | (267 | ) | |||||
Total expenses | 729,322 | 621,798 | ||||||
Income before income taxes | 26,985 | 37,616 | ||||||
Less: income tax expense | 484 | 787 | ||||||
Net income | 26,501 | 36,829 | ||||||
Add: loss attributable to noncontrolling interests | 22 | 64 | ||||||
Net income attributable to Maiden | 26,523 | 36,893 | ||||||
Dividends on preference shares | (6,033 | ) | (9,677 | ) | ||||
Net income attributable to Maiden common shareholders | $ | 20,490 | $ | 27,216 | ||||
Basic earnings per share attributable to Maiden common shareholders | $ | 0.24 | $ | 0.37 | ||||
Diluted earnings per share attributable to Maiden common shareholders | $ | 0.23 | $ | 0.35 | ||||
Dividends declared per common share | $ | 0.15 | $ | 0.14 | ||||
Weighted average number of common shares - basic | 86,350,850 | 73,871,277 | ||||||
Adjusted weighted average number of common shares and assumed conversions - diluted | 87,436,604 | 85,799,377 |
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, | ||||||||
2017 | 2016 | |||||||
Net income | $ | 26,501 | $ | 36,829 | ||||
Other comprehensive income | ||||||||
Net unrealized holdings gains on available-for-sale fixed maturities arising during the period | 6,119 | 103,404 | ||||||
Adjustment for reclassification of net realized losses recognized in net income | 637 | 632 | ||||||
Foreign currency translation adjustment | (6,198 | ) | (10,734 | ) | ||||
Other comprehensive income, before tax | 558 | 93,302 | ||||||
Income tax benefit (expense) related to components of other comprehensive income | 41 | (36 | ) | |||||
Other comprehensive income, after tax | 599 | 93,266 | ||||||
Comprehensive income | 27,100 | 130,095 | ||||||
Net loss attributable to noncontrolling interests | 22 | 64 | ||||||
Other comprehensive income attributable to noncontrolling interests | (5 | ) | (29 | ) | ||||
Comprehensive loss attributable to noncontrolling interests | 17 | 35 | ||||||
Comprehensive income attributable to Maiden | $ | 27,117 | $ | 130,130 |
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, | 2017 | 2016 | ||||||
Preference shares – Series A, B and C | ||||||||
Beginning balance | $ | 315,000 | $ | 480,000 | ||||
Ending balance | 315,000 | 480,000 | ||||||
Common shares | ||||||||
Beginning balance | 873 | 747 | ||||||
Exercise of options and issuance of shares | 3 | 3 | ||||||
Ending balance | 876 | 750 | ||||||
Additional paid-in capital | ||||||||
Beginning balance | 749,256 | 579,178 | ||||||
Exercise of options and issuance of common shares | 515 | 345 | ||||||
Share-based compensation expense | 923 | 1,256 | ||||||
Ending balance | 750,694 | 580,779 | ||||||
Accumulated other comprehensive income | ||||||||
Beginning balance | 14,997 | (23,767 | ) | |||||
Change in net unrealized gains (losses) on investment | 6,797 | 104,000 | ||||||
Foreign currency translation adjustment | (6,203 | ) | (10,763 | ) | ||||
Ending balance | 15,591 | 69,470 | ||||||
Retained earnings | ||||||||
Beginning balance | 285,662 | 316,184 | ||||||
Net income attributable to Maiden | 26,523 | 36,893 | ||||||
Dividends on preference shares | (6,033 | ) | (9,677 | ) | ||||
Dividends on common shares | (12,988 | ) | (10,365 | ) | ||||
Ending balance | 293,164 | 333,035 | ||||||
Treasury shares | ||||||||
Beginning balance | (4,991 | ) | (4,521 | ) | ||||
Shares repurchased | (575 | ) | (470 | ) | ||||
Ending balance | (5,566 | ) | (4,991 | ) | ||||
Noncontrolling interests in subsidiaries | ||||||||
Beginning balance | 355 | 1,278 | ||||||
Dividend paid to noncontrolling interest | — | (11 | ) | |||||
Net loss attributable to noncontrolling interests | (22 | ) | (64 | ) | ||||
Foreign currency translation adjustment | 5 | 29 | ||||||
Ending balance | 338 | 1,232 | ||||||
Total equity | $ | 1,370,097 | $ | 1,460,275 |
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, | 2017 | 2016 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 26,501 | $ | 36,829 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and share-based compensation | 1,640 | 4,780 | ||||||
Net realized gains on investment | (885 | ) | (2,277 | ) | ||||
Foreign exchange losses (gains) | 1,921 | (267 | ) | |||||
Changes in assets – (increase) decrease: | ||||||||
Reinsurance balances receivable, net | (204,287 | ) | (218,880 | ) | ||||
Reinsurance recoverable on unpaid losses | (8,792 | ) | (12,392 | ) | ||||
Accrued investment income | 386 | (1,373 | ) | |||||
Deferred commission and other acquisition expenses | (47,280 | ) | (44,002 | ) | ||||
Other assets | (6,461 | ) | (35,609 | ) | ||||
Changes in liabilities – increase (decrease): | ||||||||
Reserve for loss and loss adjustment expenses | 89,175 | 54,846 | ||||||
Unearned premiums | 193,550 | 203,281 | ||||||
Accrued expenses and other liabilities | (26 | ) | 24,068 | |||||
Net cash provided by operating activities | 45,442 | 9,004 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of investments: | ||||||||
Purchases of fixed-maturities – available-for-sale | (118,935 | ) | (268,661 | ) | ||||
Purchases of other investments | (120 | ) | (46 | ) | ||||
Sale of investments: | ||||||||
Proceeds from sales of fixed-maturities – available-for-sale | 30,784 | 67,837 | ||||||
Proceeds from maturities and calls of fixed maturities – available-for-sale | 105,181 | 106,168 | ||||||
Proceeds from sale and redemption of other investments | 266 | 307 | ||||||
(Increase) decrease in restricted cash and cash equivalents | (5,619 | ) | 97,701 | |||||
Other, net | (367 | ) | (178 | ) | ||||
Net cash provided by investing activities | 11,190 | 3,128 | ||||||
Cash flows from financing activities: | ||||||||
Issuance of common shares | 518 | 348 | ||||||
Repurchase of common shares | (575 | ) | (470 | ) | ||||
Dividends paid – Maiden common shareholders | (12,948 | ) | (10,328 | ) | ||||
Dividends paid – preference shares | (6,033 | ) | (9,677 | ) | ||||
Net cash used in financing activities | (19,038 | ) | (20,127 | ) | ||||
Effect of exchange rate changes on foreign currency cash | 196 | 3,594 | ||||||
Net increase (decrease) in cash and cash equivalents | 37,790 | (4,401 | ) | |||||
Cash and cash equivalents, beginning of period | 45,747 | 89,641 | ||||||
Cash and cash equivalents, end of period | $ | 83,537 | $ | 85,240 |
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. ("Maiden Holdings") 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, 2016. Certain reclassifications have been made for 2016 to conform to the 2017 presentation and have no impact on consolidated 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, 2016 except for the following:
Recently Adopted Accounting Standards Updates
Improvements to Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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. Based on the Company's history, forfeitures have never been material. The Company will account for forfeitures as they occur. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. There were no forfeitures for the three months ended March 31, 2017.
Recently Issued Accounting Standards Not Yet Adopted
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08 to amend the amortization period for certain purchased callable debt securities held at a premium. Current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.
The amendments in ASU 2017-08 affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. The amendments shorten the amortization period for certain callable debt securities held at a premium and require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.
The Company holds a number of securities with callable features on the Condensed Consolidated Balance Sheet and this includes certain securities that have been purchased at a premium that is being amortized to the associated security's maturity date. The Company is currently evaluating the impact of this guidance on the Company's results of operations, financial position or liquidity at the date of adoption.
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 Information
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 our wholly owned subsidiary, Maiden Reinsurance Ltd. ("Maiden Bermuda") from AmTrust Financial Services, Inc. ("AmTrust"), primarily the AmTrust Quota Share and the European Hospital Liability Quota Share. 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. Please refer to "Note 8. Related Party Transactions" for additional information.
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 unearned reinsurance premiums ceded (presented as part of other assets in the Condensed Consolidated Balance Sheet). 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:
For the Three Months Ended March 31, 2017 | Diversified Reinsurance | AmTrust Reinsurance | Other | Total | ||||||||||||
Gross premiums written | $ | 332,045 | $ | 591,382 | $ | — | $ | 923,427 | ||||||||
Net premiums written | $ | 327,496 | $ | 573,052 | $ | — | $ | 900,548 | ||||||||
Net premiums earned | $ | 201,842 | $ | 507,642 | $ | — | $ | 709,484 | ||||||||
Other insurance revenue | 3,781 | — | — | 3,781 | ||||||||||||
Net loss and loss adjustment expense ("loss and LAE") | (138,649 | ) | (341,631 | ) | (289 | ) | (480,569 | ) | ||||||||
Commission and other acquisition expenses | (57,945 | ) | (164,084 | ) | — | (222,029 | ) | |||||||||
General and administrative expenses | (8,730 | ) | (805 | ) | — | (9,535 | ) | |||||||||
Underwriting income (loss) | $ | 299 | $ | 1,122 | $ | (289 | ) | 1,132 | ||||||||
Reconciliation to net income | ||||||||||||||||
Net investment income and realized gains on investment | 43,042 | |||||||||||||||
Interest and amortization expenses | (6,856 | ) | ||||||||||||||
Amortization of intangible assets | (533 | ) | ||||||||||||||
Foreign exchange losses | (1,921 | ) | ||||||||||||||
Other general and administrative expenses | (7,879 | ) | ||||||||||||||
Income tax expense | (484 | ) | ||||||||||||||
Net income | $ | 26,501 | ||||||||||||||
Net loss and LAE ratio(1) | 67.5 | % | 67.3 | % | 67.4 | % | ||||||||||
Commission and other acquisition expense ratio(2) | 28.2 | % | 32.3 | % | 31.1 | % | ||||||||||
General and administrative expense ratio(3) | 4.2 | % | 0.2 | % | 2.4 | % | ||||||||||
Expense ratio(4) | 32.4 | % | 32.5 | % | 33.5 | % | ||||||||||
Combined ratio(5) | 99.9 | % | 99.8 | % | 100.9 | % |
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 Information (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 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 (loss) income | $ | (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 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 | % | ||||||||||
Expense ratio(4) | 35.7 | % | 31.8 | % | 33.9 | % | ||||||||||
Combined ratio(5) | 102.9 | % | 95.3 | % | 98.9 | % |
(1) | Calculated by dividing net loss and LAE by the sum of net premiums earned and other insurance revenue. |
(2) | Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. |
(3) | Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. |
(4) | Calculated by adding together the commission and other acquisition expense ratio and general and administrative expense ratio. |
(5) | Calculated by adding together net loss and LAE ratio and the expense ratio. |
The following tables summarize the financial position of our reportable segments including the reconciliation to our consolidated assets at March 31, 2017 and December 31, 2016:
March 31, 2017 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,903,557 | $ | 4,095,845 | $ | 5,999,402 | ||||||
Corporate assets | — | — | 557,557 | |||||||||
Total Assets | $ | 1,903,557 | $ | 4,095,845 | $ | 6,556,959 | ||||||
December 31, 2016 | Diversified Reinsurance | AmTrust Reinsurance | Total | |||||||||
Total assets - reportable segments | $ | 1,787,320 | $ | 3,900,067 | $ | 5,687,387 | ||||||
Corporate assets | — | — | 564,912 | |||||||||
Total Assets | $ | 1,787,320 | $ | 3,900,067 | $ | 6,252,299 |
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 Information (continued)
The following table sets forth financial information relating to net premiums written by major line of business and reportable segment for the three months ended March 31, 2017 and 2016:
For the Three Months Ended March 31, | 2017 | 2016 | ||||||||||||
Total | % of Total | Total | % of Total | |||||||||||
Net premiums written | ||||||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 73,377 | 8.2 | % | $ | 61,869 | 7.8 | % | ||||||
Casualty | 177,558 | 19.7 | % | 155,280 | 19.6 | % | ||||||||
Accident and Health | 48,649 | 5.4 | % | 39,572 | 5.0 | % | ||||||||
International | 27,912 | 3.1 | % | 29,415 | 3.7 | % | ||||||||
Total Diversified Reinsurance | 327,496 | 36.4 | % | 286,136 | 36.1 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 392,566 | 43.6 | % | 362,499 | 45.7 | % | ||||||||
Specialty Program | 91,869 | 10.2 | % | 76,791 | 9.7 | % | ||||||||
Specialty Risk and Extended Warranty | 88,617 | 9.8 | % | 67,405 | 8.5 | % | ||||||||
Total AmTrust Reinsurance | 573,052 | 63.6 | % | 506,695 | 63.9 | % | ||||||||
Total Net Premiums Written | $ | 900,548 | 100.0 | % | $ | 792,831 | 100.0 | % |
The following table sets forth financial information relating to net premiums earned by major line of business and reportable segment for the three months ended March 31, 2017 and 2016:
For the Three Months Ended March 31, | 2017 | 2016 | ||||||||||||
Total | % of Total | Total | % of Total | |||||||||||
Net premiums earned | ||||||||||||||
Diversified Reinsurance | ||||||||||||||
Property | $ | 39,894 | 5.6 | % | $ | 32,710 | 5.3 | % | ||||||
Casualty | 123,150 | 17.4 | % | 100,166 | 16.3 | % | ||||||||
Accident and Health | 20,689 | 2.9 | % | 17,804 | 2.9 | % | ||||||||
International | 18,109 | 2.6 | % | 21,576 | 3.5 | % | ||||||||
Total Diversified Reinsurance | 201,842 | 28.5 | % | 172,256 | 28.0 | % | ||||||||
AmTrust Reinsurance | ||||||||||||||
Small Commercial Business | 316,909 | 44.7 | % | 264,491 | 42.9 | % | ||||||||
Specialty Program | 99,748 | 14.0 | % | 84,199 | 13.7 | % | ||||||||
Specialty Risk and Extended Warranty | 90,985 | 12.8 | % | 95,063 | 15.4 | % | ||||||||
Total AmTrust Reinsurance | 507,642 | 71.5 | % | 443,753 | 72.0 | % | ||||||||
Total Net Premiums Earned | $ | 709,484 | 100.0 | % | $ | 616,009 | 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)
4. Investments
a) | Fixed Maturities and Other Investments |
During the three months ended March 31, 2017, we did not designate any additional fixed maturities as held-to-maturity ("HTM"). During 2016 and 2015, we designated fixed maturities with a total fair value of $155,538 and $608,722, respectively, as HTM reflecting our intent to hold these securities to maturity. The net unrealized holding gain of $15,770 and $244, respectively, 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 yield method in a manner consistent with the amortization of any premium or discount.
The original or amortized cost, estimated fair value and gross unrealized gains and losses of fixed maturities and other investments at March 31, 2017 and December 31, 2016, are as follows:
March 31, 2017 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Available-for-sale fixed maturities ("AFS"): | ||||||||||||||||
U.S. treasury bonds | $ | 5,188 | $ | 211 | $ | (10 | ) | $ | 5,389 | |||||||
U.S. agency bonds – mortgage-backed | 1,679,527 | 11,079 | (19,131 | ) | 1,671,475 | |||||||||||
U.S. agency bonds – other | 18,082 | 18 | — | 18,100 | ||||||||||||
Non-U.S. government and supranational bonds | 30,420 | 105 | (4,169 | ) | 26,356 | |||||||||||
Asset-backed securities | 244,392 | 3,850 | (79 | ) | 248,163 | |||||||||||
Corporate bonds | 1,954,125 | 32,340 | (53,327 | ) | 1,933,138 | |||||||||||
Municipal bonds | 62,207 | 3,079 | — | 65,286 | ||||||||||||
Total AFS fixed maturities | 3,993,941 | 50,682 | (76,716 | ) | 3,967,907 | |||||||||||
HTM fixed maturities: | ||||||||||||||||
Corporate bonds | 750,554 | 18,788 | (1,685 | ) | 767,657 | |||||||||||
Total HTM fixed maturities | 750,554 | 18,788 | (1,685 | ) | 767,657 | |||||||||||
Other investments | 10,074 | 3,460 | — | 13,534 | ||||||||||||
Total investments | $ | 4,754,569 | $ | 72,930 | $ | (78,401 | ) | $ | 4,749,098 |
December 31, 2016 | Original or amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
AFS fixed maturities: | ||||||||||||||||
U.S. treasury bonds | $ | 5,186 | $ | 238 | $ | (11 | ) | $ | 5,413 | |||||||
U.S. agency bonds – mortgage-backed | 1,720,436 | 12,867 | (17,265 | ) | 1,716,038 | |||||||||||
U.S. agency bonds – other | 18,082 | 20 | — | 18,102 | ||||||||||||
Non-U.S. government and supranational bonds | 35,158 | 73 | (5,297 | ) | 29,934 | |||||||||||
Asset-backed securities | 217,232 | 3,713 | (69 | ) | 220,876 | |||||||||||
Corporate bonds | 1,947,347 | 30,951 | (62,093 | ) | 1,916,205 | |||||||||||
Municipal bonds | 62,201 | 2,897 | — | 65,098 | ||||||||||||
Total AFS fixed maturities | 4,005,642 | 50,759 | (84,735 | ) | 3,971,666 | |||||||||||
HTM fixed maturities: | ||||||||||||||||
Corporate bonds | 752,212 | 16,370 | (2,447 | ) | 766,135 | |||||||||||
Total HTM fixed maturities | 752,212 | 16,370 | (2,447 | ) | 766,135 | |||||||||||
Other investments | 10,057 | 3,003 | — | 13,060 | ||||||||||||
Total investments | $ | 4,767,911 | $ | 70,132 | $ | (87,182 | ) | $ | 4,750,861 |
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)
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 prepay obligations with or without call or prepayment penalties.
AFS fixed maturities | HTM fixed maturities | |||||||||||||||
March 31, 2017 | Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
Maturity | ||||||||||||||||
Due in one year or less | $ | 57,366 | $ | 49,562 | $ | 20,755 | $ | 20,714 | ||||||||
Due after one year through five years | 647,554 | 634,020 | 285,460 | 292,104 | ||||||||||||
Due after five years through ten years | 1,332,950 | 1,332,615 | 439,252 | 449,764 | ||||||||||||
Due after ten years | 32,152 | 32,072 | 5,087 | 5,075 | ||||||||||||
2,070,022 | 2,048,269 | 750,554 | 767,657 | |||||||||||||
U.S. agency bonds – mortgage-backed | 1,679,527 | 1,671,475 | — | — | ||||||||||||
Asset-backed securities | 244,392 | 248,163 | — | — | ||||||||||||
Total fixed maturities | $ | 3,993,941 | $ | 3,967,907 | $ | 750,554 | $ | 767,657 |
The following tables summarize fixed maturities 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, 2017 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||
U.S. treasury bonds | $ | 590 | $ | (10 | ) | $ | — | $ | — | $ | 590 | $ | (10 | ) | ||||||||||
U.S. agency bonds – mortgage-backed | 958,846 | (16,318 | ) | 45,684 | (2,813 | ) | 1,004,530 | (19,131 | ) | |||||||||||||||
Non–U.S. government and supranational bonds | 189 | (5 | ) | 23,891 | (4,164 | ) | 24,080 | (4,169 | ) | |||||||||||||||
Asset-backed securities | 27,138 | (79 | ) | — | — | 27,138 | (79 | ) | ||||||||||||||||
Corporate bonds | 578,150 | (12,520 | ) | 319,342 | (42,492 | ) | 897,492 | (55,012 | ) | |||||||||||||||
Total temporarily impaired fixed maturities | $ | 1,564,913 | $ | (28,932 | ) | $ | 388,917 | $ | (49,469 | ) | $ | 1,953,830 | $ | (78,401 | ) |
At March 31, 2017, there were approximately 235 securities in an unrealized loss position with a fair value of $1,953,830 and unrealized losses of $78,401. Of these securities, there were 86 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $388,917 and unrealized losses of $49,469.
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)
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2016 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||
U.S. treasury bonds | $ | 589 | $ | (11 | ) | $ | — | $ | — | $ | 589 | $ | (11 | ) | ||||||||||
U.S. agency bonds – mortgage-backed | 997,943 | (14,440 | ) | 47,969 | (2,825 | ) | 1,045,912 | (17,265 | ) | |||||||||||||||
Non-U.S. government and supranational bonds | 3,169 | (160 | ) | 25,236 | (5,137 | ) | 28,405 | (5,297 | ) | |||||||||||||||
Asset-backed securities | 30,589 | (69 | ) | — | — | 30,589 | (69 | ) | ||||||||||||||||
Corporate bonds | 642,599 | (15,058 | ) | 357,954 | (49,482 | ) | 1,000,553 | (64,540 | ) | |||||||||||||||
Total temporarily impaired fixed maturities | $ | 1,674,889 | $ | (29,738 | ) | $ | 431,159 | $ | (57,444 | ) | $ | 2,106,048 | $ | (87,182 | ) |
At December 31, 2016, there were approximately 251 securities in an unrealized loss position with a fair value of $2,106,048 and unrealized losses of $87,182. Of these securities, there were 91 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $431,159 and unrealized losses of $57,444.
OTTI
The Company performs quarterly reviews of its fixed maturities 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, 2017, we have determined that the unrealized losses on fixed maturities were primarily due to widening of credit and interest rate spreads as well as the impact of foreign exchange rate changes on certain foreign currency denominated AFS fixed maturities 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 ("OTTI") at March 31, 2017. The Company has therefore recognized no OTTI through earnings for the three months ended March 31, 2017 (2016 - $0).
The following summarizes the credit ratings of our fixed maturities:
Ratings(1) at March 31, 2017 | Amortized cost | Fair value | % of Total fair value | ||||||||
U.S. treasury bonds | $ | 5,188 | $ | 5,389 | 0.1 | % | |||||
U.S. agency bonds | 1,697,609 | 1,689,575 | 35.7 | % | |||||||
AAA | 165,525 | 167,178 | 3.5 | % | |||||||
AA+, AA, AA- | 238,927 | 239,078 | 5.0 | % | |||||||
A+, A, A- | 1,333,851 | 1,329,187 | 28.1 | % | |||||||
BBB+, BBB, BBB- | 1,144,868 | 1,144,082 | 24.2 | % | |||||||
BB+ or lower | 158,527 | 161,075 | 3.4 | % | |||||||
Total fixed maturities | $ | 4,744,495 | $ | 4,735,564 | 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(1) at December 31, 2016 | Amortized cost | Fair value | % of Total fair value | ||||||||
U.S. treasury bonds | $ | 5,186 | $ | 5,413 | 0.1 | % | |||||
U.S. agency bonds | 1,738,518 | 1,734,140 | 36.6 | % | |||||||
AAA | 170,515 | 171,090 | 3.6 | % | |||||||
AA+, AA, AA- | 238,315 | 237,169 | 5.0 | % | |||||||
A+, A, A- | 1,386,023 | 1,374,860 | 29.0 | % | |||||||
BBB+, BBB, BBB- | 1,053,529 | 1,047,376 | 22.2 | % | |||||||
BB+ or lower | 165,768 | 167,753 | 3.5 | % | |||||||
Total fixed maturities | $ | 4,757,854 | $ | 4,737,801 | 100.0 | % |
(1) | Based on Standard & Poor’s ("S&P"), or equivalent, ratings |
b) | Other Investments |
The table below shows our portfolio of other investments:
March 31, 2017 | December 31, 2016 | |||||||||||||
Fair value | % of Total fair value | Fair value | % of Total fair value | |||||||||||
Investment in limited partnerships | $ | 5,692 | 42.0 | % | $ | 5,474 | 41.9 | % | ||||||
Investment in quoted equity | 6,842 | 50.6 | % | 6,586 | 50.4 | % | ||||||||
Other | 1,000 | 7.4 | % | 1,000 | 7.7 | % | ||||||||
Total other investments | $ | 13,534 | 100.0 | % | $ | 13,060 | 100.0 | % |
The Company has a remaining unfunded commitment on its investment in limited partnerships of approximately $452 at March 31, 2017 (2016 - $463).
c) | Net Investment Income |
Net investment income was derived from the following sources:
For the Three Months Ended March 31, | 2017 | 2016 | ||||||
Fixed maturities | $ | 42,870 | $ | 36,743 | ||||
Cash and cash equivalents | 367 | 612 | ||||||
Loan to related party | 712 | 562 | ||||||
Other | 31 | 30 | ||||||
43,980 | 37,947 | |||||||
Investment expenses | (1,823 | ) | (1,645 | ) | ||||
Net investment income | $ | 42,157 | $ | 36,302 |
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)
d) | Realized Gains (Losses) on Investment |
Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method. The following provides an analysis of net realized gains on investment included in the Condensed Consolidated Statements of Income:
For the Three Months Ended March 31, 2017 | Gross gains | Gross losses | Net | |||||||||
AFS fixed maturities | $ | 722 | $ | — | $ | 722 | ||||||
Other investments | 163 | — | 163 | |||||||||
Net realized gains on investment | $ | 885 | $ | — | $ | 885 |
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 |
Proceeds from sales of fixed maturities classified as AFS were $30,784 and $67,837 for the three months ended March 31, 2017 and 2016, respectively.
Net unrealized (losses) gains were as follows:
March 31, 2017 | December 31, 2016 | |||||||
Fixed maturities | $ | (17,336 | ) | $ | (23,635 | ) | ||
Other investments | 3,460 | 3,003 | ||||||
Total net unrealized losses | (13,876 | ) | (20,632 | ) | ||||
Deferred income tax | (43 | ) | (84 | ) | ||||
Net unrealized losses, net of deferred income tax | $ | (13,919 | ) | $ | (20,716 | ) | ||
Change, net of deferred income tax | $ | 6,797 |
e) | Restricted Cash and Cash Equivalents and Investments |
We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements.
The assets in trust as collateral are primarily cash and highly rated fixed maturities. The fair value of our restricted assets was as follows:
March 31, 2017 | December 31, 2016 | |||||||
Restricted cash – third party agreements | $ | 76,718 | $ | 56,891 | ||||
Restricted cash – related party agreements | 32,868 | 46,777 | ||||||
Restricted cash – U.S. state regulatory authorities | 111 | 120 | ||||||
Total restricted cash | 109,697 | 103,788 | ||||||
Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2017 – $1,274,642; 2016 – $1,307,926) | 1,270,138 | 1,299,569 | ||||||
Restricted investments AFS– in trust for related party agreements at fair value (Amortized cost: 2017 – $2,305,257; 2016 – $2,242,565) | 2,295,156 | 2,225,066 | ||||||
Restricted investments HTM– in trust for related party agreements at fair value (Amortized cost: 2017 – $750,554; 2016 – $752,212) | 767,657 | 766,135 | ||||||
Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2017 – $4,063; 2016 – $4,059) | 4,224 | 4,238 | ||||||
Total restricted investments | 4,337,175 | 4,295,008 | ||||||
Total restricted cash and investments | $ | 4,446,872 | $ | 4,398,796 |
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
(a) Fair Values of Financial Instruments
Fair Value Measurements — 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 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: investments in limited partnerships and an investment in preference shares of a start-up insurance producer. |
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 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, 2017.
U.S. government and U.S. agency — 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. 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. agency 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)
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.
Cash and cash equivalents (including restricted amounts), accrued investment income, reinsurance balances receivable, and certain other assets and liabilities — The carrying values reported in the condensed consolidated balance sheets for these financial instruments approximate their fair value due to their short term nature and are classified as Level 2.
Loan to related party — The carrying value reported in the condensed consolidated balance sheets for this financial instrument approximates its fair value and it is included in the Level 2 hierarchy.
Senior notes — The amount reported in the condensed consolidated balance sheets for these financial instruments represents the carrying value of the notes. The fair values are based on indicative market pricing obtained from a third-party service provider 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.
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)
At March 31, 2017 and December 31, 2016, we classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
March 31, 2017 | 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 | $ | 5,389 | $ | — | $ | — | $ | 5,389 | ||||||||
U.S. agency bonds – mortgage-backed | — | 1,671,475 | — | 1,671,475 | ||||||||||||
U.S. agency bonds – other | — | 18,100 | — | 18,100 | ||||||||||||
Non-U.S. government and supranational bonds | — | 26,356 | — | 26,356 | ||||||||||||
Asset-backed securities | — | 248,163 | — | 248,163 | ||||||||||||
Corporate bonds | — | 1,933,138 | — | 1,933,138 | ||||||||||||
Municipal bonds | — | 65,286 | — | 65,286 | ||||||||||||
Other investments | 6,842 | — | 6,692 | 13,534 | ||||||||||||
Total | $ | 12,231 | $ | 3,962,518 | $ | 6,692 | $ | 3,981,441 | ||||||||
As a percentage of total assets | 0.2 | % | 60.4 | % | 0.1 | % | 60.7 | % |
December 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 | $ | 5,413 | $ | — | $ | — | $ | 5,413 | ||||||||
U.S. agency bonds – mortgage-backed | — | 1,716,038 | — | 1,716,038 | ||||||||||||
U.S. agency bonds – other | — | 18,102 | — | 18,102 | ||||||||||||
Non-U.S. government and supranational bonds | — | <