x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the
quarterly period ended September 30, 2008
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. 001-33143
Maiden
Holdings, Ltd.
(Exact
name of registrant as specified in its charter)
Bermuda
04-3106389
(State
or other jurisdiction of
incorporation
or organization)
(IRS
Employer Identification No.)
48
Par-la-Ville Road, Suite 1141 HM11
HM11
(Address
of principal executive offices)
(Zip
Code)
(441)
292-7090
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
Accelerated
Filer ¨
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act). Yes o No
x
As
of
August 15, 2008, the Registrant had one class of Common Stock ($.01 par value),
of which 59,550,000 shares were issued and outstanding.
INDEX
Page
PART
I
FINANCIAL
INFORMATION
Item
1.
Consolidated
Financial Statements:
Consolidated
Balance Sheets as of September 30, 2008 (Unaudited) and December
31,
2007
3
Consolidated
Statements of Income for the three months ended September 30, 2008
and
2007, nine months ended September 30, 2008 and period from May
31, 2007
(inception) to September 30, 2007 (Unaudited)
4
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2008 and
period from May 31, 2007 (inception) to September 30, 2007
(Unaudited)
5
Consolidated
Statements of Changes in Shareholders’ Equity for the nine months ended
September 30, 2008 and period from May 31, 2007 (inception) to
September
30, 2007 (Unaudited)
6
Notes
to Consolidated Financial Statements (Unaudited)
7
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
18
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
29
Item
4.
Controls
and Procedures
30
PART
II
OTHER
INFORMATION
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
31
Item
4.
Submission
of Matters to a vote of Security Holders
31
Item
6.
Exhibits
32
Signatures
2
PART
1 -
FINANCIAL INFORMATION
Item 1. Financial Statements
MAIDEN
HOLDINGS, LTD.
CONSOLIDATED
BALANCE SHEETS
(in
thousands (000’s), except per share data)
(Unaudited)
September 30, 2008
December 31, 2007
Assets
Fixed
maturities, available-for-sale, at fair value (amortized cost
$749,798 ;
$488,765)
$
687,186
$
474,789
Other
investments, at fair value (cost $10,315; $15,176)
10,071
15,656
Total
investments
697,257
490,445
Cash
and cash equivalents
82,443
35,729
Accrued
investment income
5,423
3,204
Reinsurance
balances receivable, net (primarily with related parties - see
note 8)
98,779
27,990
Loan
to related party (see note 8)
167,975
113,542
Prepaid
expenses and other assets
420
454
Deferred
commission and other acquisition costs (primarily with related
parties -
see note 8)
88,615
44,215
Furniture
and equipment,
net
63
29
Total
Assets
$
1,140,975
$
715,608
Liabilities
and Shareholders’ Equity
Liabilities
Loss
and loss adjustment expense reserves (primarily with related
parties - see
note 8)
$
123,621
$
38,508
Unearned
premiums (primarily with related parties - see
note 8)
267,799
137,166
Accrued
expenses and other liabilities
4,670
2,589
Due
to broker
5,656
-
Securities
sold under agreements to repurchase, at contract value
260,775
-
Total
Liabilities
662,521
178,263
Shareholders’
Equity:
Common
shares, $0.01 par value; 100,000,000 shares authorized, 59,550,000
issued
and outstanding
596
596
Additional
paid-in capital
530,258
529,647
Accumulated
other comprehensive loss
(62,856
)
(13,496
)
Retained
earnings
10,456
20,598
Total
Shareholders’ Equity
478,454
537,345
Total
Liabilities and Shareholders’ Equity
$
1,140,975
$
715,608
See
accompanying notes to the unaudited consolidated financial
statements.
Net
premiums written (primarily with related parties - see
note 8)
$
113,187
$
190,801
$
386,870
$
190,801
Change
in unearned premiums
408
(127,835
)
(130,631
)
(127,835
)
Net
earned premium
113,595
62,966
256,239
62,966
Net
investment income
8,974
7,503
24,346
7,562
Net
realized investment gains(loss)
(42,538
)
87
(42,375
)
87
Total
revenues
80,031
70,556
238,210
70,615
Expenses:
Loss
and loss adjustment expenses (primarily with related parties
- see
note 8)
66,915
37,667
148,362
37,667
Commission
and other acquisition expenses (primarily with related parties
- see
note 8)
38,299
20,307
85,057
20,307
Salaries
and benefits
673
211
1,820
211
Foreign
exchange loss
359
1
364
1
Other
operating expenses
1,301
1,030
3,816
1,166
Total
expenses
107,547
59,216
239,419
59,352
Net
income (loss)
$
(27,516
)
$
11,340
(1,209
)
$
11,263
Basic
and diluted earnings (loss) per common share
$
(0.46
)
$
0.20
(0.02
)
$
0.25
Dividends
declared per common share
$
0.05
$
0.025
0.15
$
0.025
See
accompanying notes to the unaudited consolidated financial
statements.
4
MAIDEN
HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands (000’s), except per share data)
(Unaudited)
For the Nine Months
Ended
September 30, 2008
Period from
May 31, 2007
(inception) to
September 30,
2007
Cash
flows from operating activities:
Net
income (loss)
$
(1,209
)
$
11,263
Adjustments
to reconcile net income to net cash provided by operating activities
:
Depreciation
18
1
Net
realized gain on sales of investments
(163
)
(87
)
Other
than temporary impairment on investments
42,538
-
Foreign
exchange loss on revaluation
356
-
Amortization
of bond premium and discount
(2,040
)
(135
)
Amortization
of share-based compensation expense
611
137
Changes
in assets - (increase) decrease:
Reinsurance
balances receivable
(71,145
)
(113,114
)
Accrued
investment income
(2,219
)
(3,210
)
Deferred
commission and other acquisition costs
(44,400
)
(41,227
)
Prepaid
expenses and other assets
34
(574
)
Changes
in liabilities - increase (decrease):
Accrued
expenses and other liabilities
(897
)
1,646
Loss
and loss adjustment expense reserves
85,113
21,514
Unearned
premiums
130,633
127,835
Net
cash provided by operating activities
137,230
4,049
Cash
flows from investing activities:
Purchases
of investments:
Purchases
of fixed-maturity securities
(379,010
)
(414,152
)
Purchases
of other investments
(340
)
-
Sale
of investments:
Proceeds
from sales of fixed-maturity securities
-
49,377
Proceeds
from maturities and calls on fixed maturity investments
88,499
861
Purchase
of furniture and equipment
(52
)
(25
)
Loan
to related party
(54,433
)
-
Net
cash used in investing activities
(345,336
)
(363,939
)
Cash
flows from financing activities:
Repurchase
agreements, net
260,775
-
Common
shares issuance
-
529,919
Dividend
paid
(5,955
)
-
Net
cash provided by financing activities
254,820
529,919
Net
increase in cash and cash equivalents
46,714
170,029
Cash
and cash equivalents, beginning of period
35,729
-
Cash
and cash equivalents, end of period
$
82,443
$
170,029
See
accompanying notes to the unaudited consolidated financial
statements.
5
MAIDEN
HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in
thousands
(000’s),
except
per
share data)
(Unaudited)
For
the Period
from May 31, 2007 (inception)
to September 30, 2007
Common
Shares
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders’
Equity
Balance
at May 31, 2007
$
-
$
-
$
-
$
-
$
-
Shares
issued, net
596
529,323
529,919
Net
income
-
-
-
11,263
11,263
Net
unrealized losses
-
-
(4,700
)
-
(4,700
)
Comprehensive
Income
6,563
Share
based compensation
-
137
-
-
137
Dividends
to shareholders
-
-
-
(1,489
)
(1,489
)
Balance
at September 30, 2007
$
596
$
529,460
$
(4,700
)
$
9,774
$
535,130
For
the Nine Months Ended
September 30, 2008
Common Shares
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders’
Equity
Balance at December 31, 2007
$
596
$
529,647
$
(13,496
)
$
20,598
$
537,345
Net
loss
-
(1,209
)
(1,209
)
Net
unrealized losses
-
(49,360
)
-
(49,360
)
Comprehensive
Income
(50,569
)
Share
based compensation
-
611
611
Dividends
to shareholders
-
(8,933
)
(8,933
)
Balance
at September 30, 2008
$
596
$
530,258
$
(62,856
)
$
10,456
$
478,454
See
accompanying notes to the unaudited consolidated financial statements.
6
Notes
to Consolidated Financial Statements
(in
thousands (000’s), except per share data)
(Unaudited)
1.
Basis
of Presentation — Summary of Significant Accounting
Policies
The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial statements and with the instructions to Form 10-Q
and Article 10 of Regulation S-X and, therefore, do not include all of the
information and footnotes required by GAAP for complete financial statements.
These interim statements should be read in conjunction with the financial
statements and notes thereto included in the Maiden Holdings, Ltd. (“Maiden” or
the “Company”) Annual Report to Security Holders for the year ended December 31,
2007, previously filed with the Securities and Exchange Commission (“SEC”) on
May 15, 2008. The balance sheet at December 31, 2007 has been derived from
the
audited consolidated financial statements at that date but does not include
all
of the information and footnotes required by GAAP for complete financial
statements.
These
interim consolidated financial statements reflect all adjustments that are,
in
the opinion of management, necessary for a fair presentation of the results
for
the interim period and all such adjustments are of a normal recurring nature.
The results of operations for the interim period are not necessarily indicative,
if annualized, of those to be expected for the full year. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
A
detailed description of the Company’s significant accounting policies and
management judgments is located in the audited consolidated financial statements
for the year ended December 31, 2007, included in the Company’s Form ARS filed
with the SEC.
All
significant inter-company transactions and accounts have been eliminated
in the
consolidated financial statements.
2.
Recent
Accounting Pronouncements
In
October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) 157-3, Determining the Fair Value of a Financial Asset
When the Market For That Asset Is Not Active (FSP 157-3), with an immediate
effective date, including prior periods for which financial statements have
not
been issued. FSP 157-3 amends FASB 157 to clarify the application of fair
value in inactive markets and allows for the use of management’s internal
assumptions about future cash flows with appropriately risk-adjusted discount
rates when relevant observable market data does not exist. The objective
of FASB 157 has not changed and continues to be the determination of the
price
that would be received in an orderly transaction that is not a forced
liquidation or distressed sale at the measurement date. The adoption of
FSP 157-3 in the third quarter did not have a material effect on the Company’s
results of operations, financial position or liquidity.
In
June
2008, the FASB issued FSP No. 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities” (“FSP
03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are to be included in the
computation of earnings per share under the two-class method described in
Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”),
“Earnings Per Share.” This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and requires all presented
prior-period earnings per share data to be adjusted retrospectively. We
are currently evaluating the impact, if any, that FSP 03-6-1 will have on
our
consolidated financial statements.
In
May
2008, the FASB issued FASB Statement No. 163 (“SFAS 163”), “Accounting
for Financial Guarantee Insurance Contracts”, an interpretation of SFAS
Statement No. 60. SFAS 163 requires that an insurance enterprise recognize
a claim liability prior to an event of default (insured event) when there
is
evidence that credit deterioration has occurred in an insured financial
obligation. SFAS 163 also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement
to be
used to account for premium revenue and claim liabilities. Those clarifications
will increase comparability in financial reporting of financial guarantee
insurance contracts by insurance enterprises. SFAS 163 also requires
expanded disclosures about financial guarantee insurance contracts.
SFAS 163 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. We are currently
evaluating the impact, if any, that SFAS 163 will have on our consolidated
financial statements.
In
May
2008, the FASB issued FASB Statement No. 162 (“SFAS 162”), “The
hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles) in the United States. This Statement shall be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
(PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company does
not
believe the adoption will have a material impact on its financial condition
or
results of operations.
In
March
2008, the FASB issued FASB Statement No. 161 (“SFAS 161”),
“Disclosures about Derivative Instruments and Hedging Activities ”.
SFAS 161 requires companies with derivative instruments to disclose
information that should enable financial-statement users to understand how
and
why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FASB Statement No. 133
“Accounting for Derivative Instruments and Hedging Activities” and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. We are currently evaluating the impact, if any, that
SFAS 161 will have on our consolidated financial
statements.
7
3.
Investments
The
original or amortized cost, estimated fair value and gross unrealized gains
and
losses of available-for-sale fixed maturities and other investments as of
September 30, 2008 and December 31, 2007, are as follows:
(a)
Available-for-Sale
Fixed Maturities and Other Investments
Net
investment income was derived from the following sources:
For the Three Months
Ended September 30,
2008
For the Three
Months Ended
September 30,
2007
For the Nine
Months Ended
September 30,
2008
Period from May
31, 2007
(inception) to
September 30,
2007
Fixed
maturities
$
9,394
$
3,822
$
23,362
$
3,822
Cash
and cash equivalents
441
4,169
1,824
4,228
Loan
to related party
1,481
-
3,766
-
11,316
7,991
28,952
8,050
Less:
Investment
expenses
(290
)
(488
)
(1,103
)
(488
)
Interest
expense on securities sold under agreements to repurchase
(2,052
)
-
(3,503
)
-
$
8,974
$
7,503
$
24,346
$
7,562
8
(c)
Other-Than-Temporary Impairment
We
review
our investment portfolio for impairment on a quarterly basis. Impairment
of
investments results in a charge to operations when a fair value decline
below
cost is deemed to be other-than-temporary. As of September 30, 2008, we
reviewed
our portfolio to evaluate the necessity of recording impairment losses
for
other-than-temporary declines in the fair value of investments. During
the
three
months and nine months ended September 30, 2008, the
Company
recognized other than temporary impairment on Lehman Brothers Inc. and
Washington Mutual, Inc. fixed income securities and other investments of
$17,376, $19,961 and $5,201, respectively. Other than those mentioned above,
there were
no
other-than-temporary declines in the fair values of investments held in
our
investment portfolio.
The
tables below summarize the gross unrealized losses of our available-for-sale
securities and other investments as of September 30, 2008:
Less than 12 months
12 months or more
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
Losses
Fair
value
Unrealized
losses
Available-for-sale securities:
U.S.
Agency mortgage backed securities
$
115,819
(2,371
)
$
58,645
(1,045
)
$
174,464
(3,417
)
Corporate
fixed maturities
103,922
(19,856
)
158,025
(43,518
)
261,947
(63,374
)
219,741
(22,227
)
216,670
(44,564
)
436,411
(66,791
)
Other
investments
$
4,756
(244
)
$
-
-
$
4,756
(244
)
Total
temporarily impaired available-for-sale securities and other
investments
$
224,497
(22,471
)
$
216,670
(44,564
))
$
441,167
(67,035
)
As
of
September 30, 2008, there were approximately 35 securities in an unrealized
loss
position with a fair value of $441.2 million. Of these securities, there
are 23
securities that have been in an unrealized loss position for 12 months or
greater with a fair value of $216.7 million.
The
tables below summarize the gross unrealized losses of our available-for-sale
securities and other investments as of December 31, 2007:
Less than 12 months
12 months or more
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
Losses
Fair
value
Unrealized
losses
Available-for-sale securities:
U.S.
Agency mortgage backed securities
$
-
-
$
-
-
$
-
-
Corporate
fixed maturities
249,233
(15,081
)
-
-
249,233
(15,081
)
249,233
(15,081
)
-
-
249,233
(15,081
)
Other
investments
$
-
-
$
-
-
$
-
-
Total
temporarily impaired available-for-sale securities and other
investments
$
249,233
(15,081
)
$
-
-
$
249,233
(15,081
)
As
of
September 30, 2007, there were approximately 18 securities in an unrealized
loss
position with a fair value of $249.2 million. None of these securities
have been
in an unrealized loss position for 12 months or greater.
(d)
Other
The
Company enters into repurchase agreements. The agreements are accounted
for as
collateralized borrowing transactions and are recorded at contract amounts.
The
Company receives cash or securities, that it invests or holds in short
term or
fixed income securities. As of September 30, 2008, there were $260,775
principal
amount outstanding at interest rates between 2.5% and 3.8%. Interest expense
associated with these repurchase agreements was $2,052 and $3,503 for the
three
and nine months ended September 30, 2008, respectively; out of which $259
was
accrued as of September 30, 2008. The Company has approximately $260,775
of
collateral pledged in support of these agreements.
9
4.
Fair
Value of Financial
Instruments
The
Company’s estimates of fair value for financial assets and financial liabilities
are based on the framework established in SFAS 157. 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 SFAS 157
hierarchy
is based on whether the significant inputs into the valuation are observable.
In
determining the level of the hierarchy in which the estimate is disclosed,
the
highest priority is given to unadjusted quoted prices in active markets
and the
lowest priority to unobservable inputs that reflect the Company’s significant
market assumptions. The three levels of the hierarchy are as
follows:
·
Level
1 -
Unadjusted quoted market prices for identical assets or liabilities
in
active markets that the Company has the ability to
access.
·
Level
2 -
Quoted prices for similar assets or liabilities in active markets;
quoted
prices for identical or similar assets or liabilities in inactive
markets;
or valuations based on models where the significant inputs are
observable
(e.g., interest rates, yield curves, prepayment speeds, default
rates,
loss severities, etc.) or can be corroborated by observable market
data.
·
Level
3 -
Valuations based on models where significant inputs are not observable.
The unobservable inputs reflect the Company’s own assumptions about the
assumptions that market participants would
use.
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 third party, nationally, recognized pricing services
(“pricing service”). When quoted market prices are unavailable, the
Company utilizes a pricing service to determine an estimate of fair value.
The fair value estimates are included in the Level 2 hierarchy
(approximately 98.6% of total investment portfolio). The Company will
challenge any prices for its investments which are considered to not represent
fair value. If quoted market prices and an estimate from a
pricing service is unavailable, the Company produces an estimate of fair
value
based on dealer quotations for recent activity in positions with the same
or
similar characteristics to that being valued or through consensus pricing
of a
pricing service. Depending on the level of observable inputs, the Company
will then determine if the estimate is Level 2 or Level 3 hierarchy. 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
arm’s length transaction.
Fixed
Maturities (Available for Sale).
The Company utilizes a pricing service to estimate fair value measurements
for
approximately 89% of its fixed maturities. The pricing service utilizes
market quotations for fixed maturity securities that have quoted market
prices
in active markets. Since fixed maturities other than U.S. treasury
securities generally do not trade on a daily basis, the pricing service
prepares
estimates of fair value measurements using relevant market data, benchmark
curves, sector groupings and matrix pricing. The pricing service utilized
by the Company has indicated they will only produce an estimate of fair
value if
there is verifiable information to produce a valuation. As the fair value
estimates of most fixed maturity investments are based on observable market
information rather than market quotes, the estimates of fair value other
than
U.S. Treasury securities are included in Level 2 of the hierarchy.
The Company’s Level 2 investments include obligations of U.S. government
agencies and, corporate debt securities. Additionally, for approximately
11% of the Company’s fixed maturities the Company utilized dealer quotes based
on recent activity, consensus pricing through a pricing services’ proprietary
methodology or a methodology using yield spreads of comparable fixed maturities
with similar yield spreads of comparable bonds of the same issuer.
Other investments.
The
Company has $10,071 or approximately 1.4% of its investment portfolio in
limited
partnerships or hedge funds where the fair value estimate is determined
by a
fund manager based on recent filings, operating results, balance sheet
stability, growth and other business and market sector fundamentals. Due
to the
significant unobservable inputs in these valuations, the Company includes
the
estimate in the amount disclosed in Level 3. The Company has determined
that its investments in Level 3 securities are not material to its financial
position or results of operations.
Fair
Value Hierarchy
The
following table presents the level within the fair value hierarchy at which
the
Company’s financial assets and financial liabilities are measured on a recurring
basis as of September 30, 2008:
Total
Level
1
Level
2
Level
3
Assets:
Available-for-sale
fixed maturities
$
687,186
$
-
$
687,186
$
-
Other
investments
10,071
-
-
10,071
$
697,257
$
-
$
687,186
$
10,071
Liabilities:
Securities
sold under agreements to repurchase, at contract value
(260,775
)
-
(260,775
)
-
$
436,482
$
-
$
426,411
$
10,071
10
The
following table provides a summary of changes in fair value of the Company’s
Level 3 financial assets as of September 30, 2008:
Three Months
Ended
September 30,
2008
Nine Months
Ended September
30, 2008
Beginning
balance
$
12,134
$
15,656
Total
net losses for the period included in:
Net
loss
(5,201
)
(5,201
)
Other
comprehensive income (loss)
3,107
(724
)
Purchases,
sales, issuances and settlements, net
31
340
Net
transfers into (out of) Level 3
-
-
Ending
balance as of September 30, 2008
$
10,071
$
10,071
5.
Earnings
Per Share
The
following is a summary of the elements used in calculating basic and diluted
earnings per share:
Three Months
Ended
September 30,
2008
Three Months
Ended
September 30,
2007
Nine Months
Ended
September
30, 2008
Period from may
31, 2007 (inception)
to September 30,
2007
Net
income available to common shareholders
$
(27,516
)
$
11,340
$
(1,209
)
$
11,263
Weighted
average number of common shares outstanding - basic
59,550,000
57,716,859
59,550,000
44,184,968
Potentially
dilutive securities:
Warrants
-
-
-
-
Share
options
-
-
-
-
Weighted
average number of common shares outstanding - diluted
59,550,000
57,716,859
59,550,000
44,184,968
Basic
and diluted earnings per common share:
$
(0.46
)
$
0.20
$
(0.02
)
$
0.25
As
of
September 30, 2008, the total weighted-average of 4,050,000 warrants and
893,529
share options were excluded from diluted earnings per share as they were
anti-dilutive.
The
Company’s 2007 Share Incentive Plan (the “Plan”) provides for grants of options
and restricted shares. The total number of shares currently reserved for
issuance under the Plan is 2,800,000 common shares. The Plan is administered
by
the Compensation Committee of the Board of Directors. Exercise prices of
options
will be established at or above the fair market value of the Company’s common
shares at the date of grant. Under the 2007 Share Incentive Plan, unless
otherwise determined by the compensation committee and provided in an award
agreement, 25% of the options will become exercisable on the first anniversary
of the grant date, with an additional 6.25% of the options vesting each
quarter
thereafter based on the grantee’s continued employment over a four-year period,
and will expire ten years after grant date.
Share
Options
The
fair
value of each option grant is separately estimated for each vesting date.
The
fair value of each option is amortized into compensation expense on a
straight-line basis between the grant date for the award and each vesting
date.
The Company has estimated the fair value of all share option awards as
of the
date of the grant by applying the Black-Scholes-Merton multiple-option
pricing
valuation model. The application of this valuation model involves assumptions
that are judgmental and highly sensitive in the determination of compensation
expense. The adoption of SFAS No. 123R’s fair value method has resulted in
share-based expense (a component of salaries and benefits) in the amount
of
approximately $219 and $611 for the three and nine months ended September
30,
2008, respectively. The share-based expense was $137 for
the
three months ended September 30, 2007 and for the period from May 31, 2007
(inception) to September 30, 2007.
11
The
key
assumptions used in determining the fair value of options granted in 2008
and a
summary of the methodology applied to develop each assumption are as
follows:
Assumptions
:
2008
Volatility
29.8
%
Risk-free
interest rate
3.30
%
Weighted
average expected lives in years
6.1
years
Forfeiture
rate
0
%
Dividend
yield rate
1
%
Expected
Price Volatility
- This
is a measure of the amount by which a price has fluctuated or is expected
to
fluctuate. At the times the Company granted options, there was no external
market for the Company’s common shares. Thus, it was not possible to use actual
experience to estimate the expected volatility of the price of the common
shares
in estimating the value of the options granted. As a substitute for such
estimate, the Company used the historical volatility of companies in the
industry in which the Company operates.
Risk-Free
Interest Rate -
This is
the U.S. Treasury rate for the week of the grant having a term equal to
the
expected life of the option. An increase in the risk-free interest rate
will
increase compensation expense.
Expected
Lives -
This is
the period of time over which the options granted are expected to remain
outstanding giving consideration to vesting schedules, historical exercise
and
forfeiture patterns. The Company uses the simplified method outlined in
SEC
Staff Accounting Bulletin No. 107 to estimate expected lives for options
granted
during the period as historical exercise data is not available and the
options
meet the requirements set out in the Bulletin. Options granted have a maximum
term of ten years. An increase in the expected life will increase compensation
expense.
Forfeiture
Rate -
This is
the estimated percentage of options granted that are expected to be forfeited
or
cancelled before becoming fully vested. An increase in the forfeiture rate
will
decrease compensation expense.
The
following schedule shows all options granted, exercised, expired and exchanged
under the Plan for the three months ended September 30, 2008:
Number of
Share Options
Weighted
Average Exercise
Price
Weighted Average
Remaining Contractual
Term
Outstanding, June 30, 2008
962,000
$
10.00
9.3
years
Granted
-
-
-
Exercised
-
-
-
Cancelled
-
-
-
Outstanding,
September 30, 2008
962,000
$
10.00
9.01
years
The
following schedule shows all options granted, exercised, expired and exchanged
under the Plan for the nine months ended September 30, 2008:
A
dividend was declared on
June 4,
2008. The Company’s Board of Directors approved a quarterly cash dividend of
$0.05 per common share payable to shareholders of record as of July 1,
2008. The
dividend was paid on July 15, 2008.
On
July
31, 2008, the Company’s Board of Directors approved a quarterly cash dividend of
$0.05 per common share. This dividend was paid on October 13, 2008 to
shareholders of record on October 2, 2008.
12
8.Related
Party Transactions
The
Founding Shareholders of Maiden, Michael Karfunkel, George Karfunkel and
Barry
Zyskind, are also the principal shareholders, and, respectively, the Chairman
of
the Board of Directors, a Director, and the Chief Executive Officer and
Director
of AmTrust. The following describes transactions between the Company and
AmTrust.
Quota
Share Reinsurance Agreement
Effective
July 1, 2007, the Company and AmTrust entered into a master agreement,
as
amended, by which they caused AmTrust’s Bermuda reinsurance subsidiary, AmTrust
International Insurance, Ltd. (“AII”) and Maiden Insurance Company Ltd. (“Maiden
Insurance”) to enter into the Reinsurance Agreement by which (a) AII retrocedes
to Maiden Insurance an amount equal to 40% of the premium written by the
AmTrust
Ceding Insurers, net of the cost of unaffiliated inuring reinsurance (and
in the
case of AmTrust’s U.K. insurance subsidiary, IGI Insurance Company Limited
(“IGI”), net of commissions) and 40% of losses and (b) AII transferred to Maiden
Insurance 40% of the AmTrust Ceding Insurers’ unearned premium reserves,
effective as of July 1, 2007, with respect to the current lines of business,
excluding risks for which the AmTrust Ceding Insurers’ net retention
exceeds $5,000 (“Covered Business”). AmTrust also has agreed to cause AII,
subject to regulatory requirements, to reinsure any insurance company which
writes Covered Business in which AmTrust acquires a majority interest to
the
extent required to enable AII to cede to Maiden Insurance 40% of the premiums
and losses related to such Covered Business. The Agreement further provides
that
AII receives a ceding commission of 31% of ceded written premiums. The
Reinsurance Agreement has an initial term of three years and will automatically
renew for successive three year terms thereafter, unless either AII or
Maiden
Insurance notifies the other of its election not to renew not less than
nine
months prior to the end of any such three year term. In addition, either
party
is entitled to terminate on thirty days notice or less upon the occurrence
of
certain early termination events, which include a default in payment,
insolvency, change in control of AII or Maiden Insurance, run-off, or a
reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the
combined shareholders’ equity of AII and the AmTrust Ceding Insurers.
On
June
11, 2008, the Company and AmTrust amended the Reinsurance Agreement to
add
Retail Commercial Package Business to the Covered Business as a consequence
of
AmTrust’s acquisition of Unitrin Business Insurance (UBI). Under the amendment,
AmTrust's subsidiaries cede, upon collection, to Maiden 100% of $82.2 million
of
unearned premium (net of inuring reinsurance) from the acquisition of UBI's
in-force book of business. Additionally, AmTrust cedes to Maiden 40% of
net
premium written, effective as of June 1, 2008. Maiden will pay to AmTrust
a
ceding commission of 34.375% on the unearned premium cession and the Retail
Commercial Package Business.
The
Company recorded approximately $36,908 and $82,524 of ceding commission
expense
for the three and nine months ended September 30, 2008, respectively as
a result
of this transaction.
Other
Reinsurance Agreement
Effective
January 1, 2008 the Company and AmTrust entered into an agreement to reinsure
a
45% participation in the $9 million in excess of $1 million layer of AmTrust's
workers' compensation excess of loss program. This layer provides reinsurance
to
AmTrust for losses per occurrence in excess of $1 million up to $10 million,
subject to an annual aggregate deductible of $1.25 million. This participation
was sourced through a reinsurance intermediary via open market placement
in
which competitive bids were solicited by an independent broker. The remaining
55% participation was placed with a single carrier.
The
following is the effect on the Company’s balance sheet as of September 30, 2008
and December 31, 2007 and the results of operations for the three and nine
months ended September 30, 2008 related to the Reinsurance Agreements with
AmTrust:
Assets
and (liabilities):
September 30,
2008
December 31,
2007
Loan
to related party
$
167,975
$
113,542
Reinsurance
balances receivable, net
84,197
27,891
Accrued
interest on loan to related party
1,481
240
Deferred
commission and other acquisition costs
81,223
42,501
Loss
and loss adjustment expense reserves
(121,475
)
(38,485
)
Unearned
premiums
(246,465
)
(137,099
)
Results
of operations:
Three Months
Ended
September 30,
2008
Three Months
Ended
September 30,
2007
Nine Months
Ended
September 30,
2008
Period from May
31, 2007
(inception) to
September 30,
2007
Net
premium written - assumed
$
102,674
$
190,801
$
361,632
$
190,801
Change
in unearned premium - assumed
8,654
(127,835
)
(109,365
)
(127,835
)
Net
earned premium - assumed
111,328
62,966
252,267
62,966
Commission
and other acquisition costs on premium written
33,570
61,534
120,113
61,534
Commission
and other acquisition costs- deferred
3,617
(41,227
)
(37,008
)
(41,227
)
Ceding
commission expensed
37,187
20,307
83,105
20,307
Loss
and loss adjustment expense
65,664
37,667
146,084
37,667
Interest
income on loan to related party
1,481
-
3,766
-
13
The
Reinsurance Agreement requires that Maiden Insurance provide to AII sufficient
collateral to secure its proportional share of AII’s obligations to the U.S.
AmTrust Ceding Insurers. The amount of the collateral, in the form of a
loan at
September 30, 2008 was $167,975 and the accrued interest was $1,481. AII
is
required to return to Maiden Insurance any assets of Maiden Insurance in
excess
of the amount required to secure its proportional share of AII’s collateral
requirements, subject to certain deductions.
Reinsurance
Brokerage Agreements
Effective
July 1, 2007, the Company entered into a reinsurance brokerage agreement
with
AII Reinsurance Broker Ltd., a subsidiary of AmTrust. Pursuant to the brokerage
agreement, AII Reinsurance Broker Ltd. provides brokerage services relating
to
the Reinsurance Agreement for a fee equal to 1.25% of the premium reinsured
from
AII. The brokerage fee is payable in consideration of AII Reinsurance Broker
Ltd.’s brokerage services. AII Reinsurance Broker Ltd. is not the Company’s
exclusive broker. AII Reinsurance Broker Ltd. may, if mutually agreed,
also
produce reinsurance for the Company from other ceding companies, and in
such
cases the Company will negotiate a mutually acceptable commission rate.
The
Company recorded approximately $1,381 and $3,131 of reinsurance brokerage
expense for the three and nine months ended September 30, 2008, respectively
and
deferred reinsurance brokerage of $3,003 as at September 30, 2008 as a
result of
this agreement. In comparison, the Company recorded approximately $787
of
reinsurance brokerage expense for
the
three months ended September 30, 2007 and for the period from May 31, 2007
(inception) to September 30, 2007 and
deferred reinsurance brokerage of $1,598 as at September 30, 2007 as a
result of
this agreement
Effective
April 1, 2008, the Company entered into brokerage services agreements with
IGI
Intermediaries Limited and IGI Inc (IGI), both subsidiaries of AmTrust.
Pursuant
to the brokerage services agreements, IGI provides marketing services to
us
which includes providing marketing material to potential policyholders,
providing us with market information on new trends and business opportunities
and referring new brokers and potential policyholders to us. A fee equal
to
IGI‘s costs in providing such services plus 8% is payable in consideration
of
IGI’s marketing services. The Company recorded approximately $401 and $811
as
expense, which is included in other operating expenses, for the three and
nine
months ended September 30, 2008.
Asset
Management Agreement
Effective
July 1, 2007, the Company entered into an asset management agreement with AII
Insurance Management Limited (“AIIM”), an AmTrust subsidiary, pursuant to which
AIIM has agreed to provide investment management services to Maiden Insurance.
Pursuant to the asset management agreement, AIIM provides investment management
services for an annual fee equal to 0.35% of average invested assets plus
all
costs incurred. Effective April 1, 2008, the investment management services
annual fee has been reduced to 0.20%. The Company recorded
approximately $254
and
$970 of investment management fees for the three and nine months ended
September
30, 2008, respectively as a result of this agreement. In comparison, the
Company
recorded approximately $470
of
investment management fees for
the
three months ended September 30, 2007 and for the period from May 31, 2007
(inception) to September 30, 2007,
respectively as a result of this agreement.
The
Company currently operates two business segments, Reinsurance - AmTrust
Quota
Share and Reinsurance - Other. The Company evaluates segment performance
based
on segment profit and includes an allocation of investment income based
on the
average investment return on the actual cash generated by the segment as
the
Company does not manage its investment portfolio by segment. Other expenses
are
allocated on an actual basis except salaries and benefits where management’s
judgment is applied, the Company does not allocate general corporate expenses
to
the segments. The following tables summarize business segments as follows:
Three
Months Ended September 30, 2008
Reinsurance - AmTrust Quota
Share
Reinsurance -
Other
Corporate
and other
Total
Revenues
Net
premium written
$
102,673
$
10,514
$
-
$
113,187
Earned
premium
110,495
3,100
-
113,595
Investment
income and other revenues
1,523
12
7,439
8,974
Other
than temporary impairment losses
-
-
(42,538
)
(42,538
)
Total
revenues
112,018
3,112
(35,099
)
80,031
Expenses
Loss
and loss adjustment expenses
65,664
1,251
-
66,915
Commission
and other acquisition expenses
36,908
1,391
-
38,299
Other
expenses
258
856
1,219
2,333
Total
expenses
102,830
3,498
1,219
107,547
Net
income (loss)
$
9,188
$
(386
)
$
(36,318
)
$
(27,516
)
14
Nine
Months Ended September 30, 2008
Reinsurance - AmTrust Quota
Share
Reinsurance -
Other
Corporate
and other
Total
Revenues
Net
premium written
$
353,690
$
33,180
$
-
$
386,870
Earned
premium
250,531
5,708
-
256,239
Investment
income and other revenues
3,904
12
20,593
24,509
Other
than temporary impairment losses
-
(42,538
)
(42,538
)
Total
revenues
254,435
5,720
(21,945
)
238,210
Expenses
Loss
and loss adjustment expenses
146,084
2,278
-
148,362
Commission
and other acquisition expenses
82,523
2,534
-
85,057
Other
expenses
635
1,485
3,880
6,000
Total
expenses
229,242
6,297
3,880
239,419
Net
income (loss)
$
25,193
$
(577
)
$
(25,825
)
$
(1,209
)
Three Months Ended to September 30, 2007
Reinsurance -
AmTrust
Quota Share
Reinsurance -
Other
Corporate
and other
Total
Revenues
Net
premium written
$
190,801
$
-
$
-
$
190,801
Earned
premium
62,966
-
-
62,966
Investment
income and other revenues
-
-
7,590
7,590
Other
than temporary impairment losses
-
-
-
-
Total
revenues
62,966
-
7,590
70,556
Expenses
Loss
and loss adjustment expenses
37,667
-
-
37,667
Commission
and other acquisition expenses
20,307
-
-
20,307
Other
expenses
5
-
1,237
1,242
Total
expenses
57,979
-
1,237
59,216
Net
income (loss)
$
4,987
$
-
$
6,353
$
11,340
Period
from May 31, 2007 (inception) to September 30, 2007
Reinsurance -
AmTrust Quota
Share
Reinsurance -
Other
Corporate
and other
Total
Revenues
Net
premium written
$
190,801
$
-
$
-
$
190,801
Earned
premium
62,966
-
-
62,966
Investment
income and other revenues
-
-
7,649
7,649
Other
than temporary impairment losses
-
-
-
-
Total
revenues
62,966
-
7,649
70,615
Expenses
Loss
and loss adjustment expenses
37,667
-
-
37,667
Commission
and other acquisition expenses
20,307
-
-
20,307
Other
expenses
5
-
1,373
1,378
Total
expenses
57,979
-
1,373
59,352
Net
income (loss)
$
4,987
$
-
$
6,276
$
11,263
15
Reinsurance - AmTrust Quota
Share
Reinsurance -
Other
Corporate and
Other
Total
As
of September 30, 2008
Reinsurance
balances receivable
$
79,642
$
19,137
$
-
$
98,779
Deferred
commission and other acquisition costs
79,144
9,471
-
88,615
Loan
to related party
167,975
-
-
167,975
Corporate
and other assets
13,243
-
772,363
785,606
Total
assets
$
340,004
$
28,608
$
772,363
$
1,140,975
Reinsurance -
AmTrust Quota
Share
Reinsurance -
Other
Corporate and
Other
Total
As of December 31,
2007
Reinsurance
balances receivable
$
27,990
$
-
$
-
$
27,990
Deferred
commission and other acquisition costs
44,215
-
-
44,215
Loan
to related party
113,542
-
-
113,542
Corporate
and other assets
-
-
529,861
529,861
Total
assets
$
185,747
$
-
$
529,861
$
715,608
The
following tables set forth financial information relating to gross and
net
premiums written and earned by major line of business for the three and
nine
months ended September 30, 2008 and 2007:
