1.      Basis of Presentation — Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Maiden Holdings, Ltd. and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.

 

These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Certain reclassifications have been made for 2009 to conform to the 2010 presentation and have no impact on net income previously reported.

 

2.      Recent Accounting Pronouncements

 

Adoption of new accounting pronouncements  

 

On June 12, 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of Financial Assets,” an amendment of FASB Statement 140 and the FASB subsequently codified it as Accounting Standard Update (“ASU”) 2009-16, updating Accounting Standards Codification (“ASC”) Topic 860 “Transfers and Servicing” and it requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of financial assets accounted for as a sale. It is a revision to FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009 and interim periods within those fiscal years. The adoption of ASU 2009-16 did not have a material impact on the Company’s consolidated results of operations and financial condition.

 

On June 12, 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” and the FASB subsequently codified as ASU 2009-17, updating ASC Topic 810 “Consolidation” and it requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It determines whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009, and interim periods within those fiscal years. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated results of operations and financial condition.

 

New accounting pronouncements issued during 2010 impacting the Company are as follows:  

 

In February 2010, the FASB issued ASU 2010-09, which requires SEC filers to evaluate subsequent events through the date the financial statements are issued. It exempts SEC filers from disclosing the date through which subsequent events have been evaluated.

 

7

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MAIDEN HOLDINGS, LTD.

 

 

 

 

3.      Investments (continued)

 

Other-than-Temporary Impairments (“OTTI”)

 

We review our investment portfolio for impairment on a quarterly basis. Impairment of investments results in a charge to operations when a fair value decline below cost is deemed to be other-than-temporary. As of March 31, 2010, we reviewed our portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. During the period ended March 31, 2010 and 2009, the Company recognized no other than temporary impairment losses.  Based on our qualitative and quantitative OTTI review of each asset class within our fixed maturity portfolio, the remaining unrealized losses on fixed maturities at March 31, 2010, were primarily due to widening of credit spreads relating to the market illiquidity, rather than credit events. Because it is more likely than not that we will not be required to sell these securities until a recovery of fair value to amortized cost, we currently believe it is probable that we will collect all amounts due according to their respective contractual terms. Therefore we do not consider these fixed maturities to be other-than-temporarily impaired at March 31, 2010.

 

(b)           Realized and unrealized gains and losses

 

Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method and include adjustments to the cost basis of investments for declines in value that are considered to be other-than-temporary. The following provides an analysis of realized gains and losses:

 

For the Three Months Ended March 31, 2010		Gross Gains				Gross Losses				Net
Fixed maturity securities		$	312			$	—			$	312
Other investments			—				—				—
Net realized gains (losses)		$	312			$	—			$	312

 

For the Three Months Ended March 31, 2009			Gross Gains				Gross Losses				Net
Fixed maturity securities		$	1,755			$	(3,670	)		$	(1,915	)
Other investments			—				(15	)			(15	)
Net realized gains (losses)		$	1,755			$	(3,685	)		$	(1,930	)

 

Proceeds from sales of fixed maturities classified as available for sale were $37,737 and $85,769 for the periods ended March 31, 2010 and 2009, respectively.

 

Net unrealized gain (loss) was as follows:

 

		March 31, 2010				March 31, 2009
Fixed maturities		$	57,039			$	(60,452	)
Other investments			(80	)			(533	)
Total net unrealized gain (loss)			56,959				(60,985	)
Deferred income tax expense			—				—
Net unrealized losses, net of deferred income tax		$	56,959			$	(60,985	)
Change in unrealized gain (loss), net of deferred income tax		$	24,212			$	(16,486	)

(c)           Restricted Cash and Investments

 

We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trust as collateral are primarily cash and highly rated fixed maturity securities. The fair value of our restricted assets was as follows:

 

MAIDEN HOLDINGS, LTD.

6.      Junior Subordinated Debt (continued)

 

Pursuant to separate Guarantee Agreements dated as of January 20, 2009 with Wilmington Trust Company, as guarantee trustee, each of the Company and Maiden NA has agreed to guarantee the payment of distributions and payments on liquidation or redemption of the Trust Preferred Securities.

 

As a consequence of the issuance of a majority of the Units to a related party under, ASC Topic 810 “Consolidation”, the Trust is a variable interest entity and the Company is deemed not to be the Primary beneficiary of the Trust and therefore it is not consolidated. The issuance of common shares associated with the Trust Preferred Securities resulted in an original issuance discount of $44,928 based on market price of $3.85 on January 20, 2009. The discount is amortized over 30 years based on the effective interest method. The Debentures and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%.

 

As of March 31, 2010, the stated value of the Trust Preferred Securities was $215,140 which comprises the principal amount of $260,000 and unamortized discount of $44,860. Amortization expense for the three months ended March 31, 2010 was $15.

 

7.      Earnings Per Share

 

The following is a summary of the elements used in calculating basic and diluted earnings per share: 

 

		Three months ended March 31, 2010				Three months ended March 31, 2009
Net income available to common shareholders		$	13,569			$	13,100
Weighted average number of common shares outstanding - basic			70,291,312				67,687,664
Potentially dilutive securities:
Warrants			—				—
Share options			485,482				250,126
Weighted average number of common shares outstanding - diluted			70,776,794				67,937,790
Basic and diluted earnings per common share:		$	0.19			$	0.19

 

As of March 31, 2010, 4,050,000 (2009: 4,050,000) warrants and 1,584,964 (2009: 662,000) share options were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

 

 

On March 3, 2010, the Company’s Board of Directors approved a quarterly cash dividend of $0.065 per common share. This dividend was paid on April 15, 2010 to shareholders of record on April 1, 2010.

 

10.    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 President and Chief Executive Officer and Director of AmTrust Financial Services, Inc. (“AmTrust”).  In January 2009, Barry Karfunkel was hired as a managing director of capital investments of Maiden Re Insurance Services, LLC. Barry Karfunkel is the son of Michael Karfunkel and the brother-in-law of Barry D. Zyskind. Barry Karfunkel’s employment ended in March 2010. The following describes transactions between the Company and AmTrust.

 

AmTrust Quota Share Reinsurance Agreement

 

Effective July 1, 2007, the Company and AmTrust entered into a master agreement, as amended (the “Master Agreement”), by which they caused AmTrust’s Bermuda reinsurance subsidiary, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance Company Ltd. (“Maiden Insurance” or “Maiden Bermuda”) to enter into the Reinsurance Agreement by which (a) AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written by subsidiaries of AmTrust, 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 subsidiaries’ unearned premium reserves, effective as of July 1, 2007, with respect to the current lines of business, excluding risks for which the AmTrust subsidiaries’ 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, which has been extended for three years through June 30, 2013, 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 subsidiaries.

 

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 $2,000 maximum liability for a single loss provided in the Quota Share Reinsurance Agreement shall not be applicable to Retail Commercial Package Business.

 

On February 9, 2009, AII and Maiden Insurance amended the Reinsurance Agreement to clarify that (i) AII would offer Maiden Insurance the opportunity to reinsure Excess Retention Business, which is defined as a policy issued by an AmTrust insurance subsidiary with respect to which the insurance subsidiary’s retention is greater than $5 million and (ii) the deduction for the cost of inuring reinsurance from Affiliate Subject Premium (as defined in the Reinsurance Agreement) retroceded to Maiden Insurance is net of ceding commission.

MAIDEN HOLDINGS, LTD.

 

(In Thousands of United States Dollars, Except Par Value and Per Share Data)

(Unaudited)

11.           Segments (continued)

 

		Diversified Reinsurance				AmTrust Quota Share				ACAC Quota Share				Total
As of March 31, 2010
Reinsurance balances receivable, net		$	212,144			$	72,630			$	14,463			$	299,237
Prepaid reinsurance			26,268				—				—				26,268
Reinsurance recoverable on unpaid losses			16,464				—				—				16,464
Deferred acquisition costs			83,078				88,243				6,933				178,254
Loan to related party			—				167,975				—				167,975
Goodwill			52,617				—				—				52,617
Intangible assets, net			49,832				—				—				49,832
Restricted investments and cash			1,065,948				246,089				—				1,312,037
Corporate and other assets			2,097				—				—				625,464
Total Assets		$	1,508,448			$	574,937			$	21,396			$	2,728,148

		Diversified Reinsurance				AmTrust Quota Share				ACAC Quota Share				Total
As of December 31, 2009
Reinsurance balances receivable, net		$	168,639			$	39,856			$	—			$	208,495
Prepaid reinsurance			28,752				—				—				28,752
Reinsurance recoverable on unpaid losses			11,984				—				—				11,984
Deferred acquisition costs			88,224				84,759				—				172,983
Loan to related party			—				167,975				—				167,975
Goodwill			52,617				—				—				52,617
Intangible assets, net			51,284				—				—				51,284
Restricted investments and cash			1,168,663				206,959				—				1,375,622
Corporate and other assets			2,502				—				—				567,182
Total Assets		$	1,572,665			$	499,549			$	—			$	2,636,894

 

The following tables set forth financial information relating to gross and net premiums written and earned by major line of business for the three months ended March 31, 2010 and 2009:

 

		For the Three Months Ended March 31, 2010								For the Three Months Ended March 31, 2009
		Total				% of Total				Total				% of Total
Net premiums written
Diversified Reinsurance
Property		$	58,053				18.6	%		$	51,448				15.3	%
Casualty			92,161				29.6	%			150,075				44.6	%
Accident and Health			17,700				5.7	%			49,654				14.8	%
Total Diversified Reinsurance			167,914				53.9	%			251,177				74.7	%
AmTrust Quota Share
Small Commercial Business			58,934				18.9	%			52,972				15.7	%
Specialty Program Business			10,074				3.3	%			9,228				2.7	%
Specialty Risk and Extended Warranty			52,548				16.9	%			23,171				6.9	%
Total AmTrust Quota Share			121,556				39.1	%			85,371				25.3	%
ACAC Quota Share
Casualty			21,821				7.0	%			—				—	%
Total ACAC Quota Share			21,821				7.0	%			—				—	%
Total net premiums written		$	311,291				100.0	%		$	336,548				100	%

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MAIDEN HOLDINGS, LTD.

 

(In Thousands of United States Dollars, Except Par Value and Per Share Data)

(Unaudited)

11.           Segments (continued)

 

		For the Three Months Ended March 31, 2010								For the Three Months Ended March 31, 2009
		Total				% of Total				Total				% of Total
Net premiums earned
Diversified Reinsurance
Property		$	41,788				15.8	%		$	25,999				12.4	%
Casualty			88,246				33.5	%			66,355				31.6	%
Accident and Health			21,146				8.0	%			25,318				12.0	%
Total Diversified Reinsurance			151,180				57.3	%			117,672				56.0	%
AmTrust Quota Share
Small Commercial Business			51,954				19.7	%			54,627				26.0	%
Specialty Program Business			14,774				5.6	%			13,348				6.4	%
Specialty Risk and Extended Warranty			43,931				16.6	%			24,445				11.6	%
Total AmTrust Quota Share			110,659				41.9	%			92,420				44.0	%
ACAC Quota Share
Casualty			2,090				0.8	%			—				—	%
Total ACAC Quota Share			2,090				0.8	%			—				—	%
Total net premiums earned		$	263,929				100.00	%		$	210,092				100.00	%

 

12.           Subsequent Events

 

On May 4, 2010, the Company declared a quarterly dividend of $0.065 per common share, payable on July 15, 2010 to shareholders of record on July 1, 2010.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. References in this Form 10-Q to the terms “we,” “us,” “our,” “the Company” or other similar terms mean the consolidated operations of Maiden Holdings, Ltd and its subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term “Holdings” means Maiden Holdings, Ltd. only.

 

Note on Forward-Looking Statement

 

This Quarterly Report on Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2010.  Since the Company commenced operations in 2007, the Company has engaged in a number of significant transactions, including entering into the AmTrust Quota Share in 2007, the GMAC Acquisition in 2008, the TRUPS Offering in 2009 and the ACAC Transaction in 2010,  each discussed below that significantly affect the comparability of results of operations from year to year.  The projections and statements in this Report speak only as of the date of this Report and those in other publicly available documents or made by our officers and representatives from time to time speak only as of their respective dates and we undertake no obligation to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by law.

 

Overview

 

We are a Bermuda-based holding company formed in June 2007 primarily focused on serving the needs of regional and specialty insurers in the United States and Europe by providing innovative reinsurance solutions designed to support their capital needs. We specialize in reinsurance solutions that optimize financing by providing coverage within the more predictable and actuarially credible lower layers of coverage and/or reinsuring risks that arc believed to be lower hazard, more predictable and generally not susceptible to catastrophe claims. Our tailored solutions include a variety of value added services focused on helping our clients grow and prosper.

 

We provide reinsurance through our wholly owned subsidiaries, Maiden Reinsurance Company ("Maiden US") and Maiden Bermuda and have operations in the United States and Bermuda. On a more limited basis, Maiden Specialty Insurance Company ("Maiden Specialty"), a wholly owned subsidiary of Maiden US, provides primary insurance on a surplus lines basis focusing on non-catastrophe inland marine and property coverages. Maiden Bermuda does not underwrite any primary insurance business.

 

We historically have managed our business through two operating segments:  Diversified Reinsurance and the AmTrust Quota Share.  In the first quarter of 2010, we have added a third segment, ACAC Quota Share, as a result of the ACAC Transaction discussed below.  As of March 31, 2010, we had approximately $710.0 million of total shareholders equity and $925.1 million in total capital, which includes shareholders’ equity and junior subordinated debt.

 

The market conditions in which we operate have historically been cyclical, experiencing cycles of price erosion followed by rate strengthening as a result of catastrophes or other significant losses that affect the overall capacity of the industry to provide coverage. During the period covered by this discussion, the reinsurance market has been characterized by significant competition in  most lines of business.

 

During 2009 and 2010, there were a number of events that impacted the property and casualty industry generally. While natural and man-made catastrophes occur each year affecting reinsurance industry results, 2009 generally featured fewer such events, favorably impacting industry performance. Further, despite the ongoing global economic recession, industry investments in risk assets performed significantly better in 2009, increasing both statutory and generally accepted accounting principles in the United States ("GAAP") capital at the individual market participant level and in the aggregate across the reinsurance industry more generally. In the first quarter of 2010, a series of significant natural catastrophes occurred, including a major earthquake in Chile, damaging windstorms in Europe (Xynthia) and a series of severe winter storms in the northeastern United States.  Consistent with its business model, the Company experienced no losses from the Chilean earthquake or European windstorms, while losses from the United States winter storms, if any, are expected to be immaterial.

 

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We believe that if such events continue, they could have a significant effect on competition and pricing, although the ultimate impact remains unclear.  As market conditions continue to develop and competition further increases, we continue to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions do not meet our underwriting standards.

 

Recent Developments

 

GMAC Acquisition

 

On October 31, 2008, we acquired the reinsurance operations of GMAC Insurance from GMACI Holdings, LLC ("GMACI"), which included the following components, the sum of which are referred to as the "GMAC Acquisition":

 

·	GMAC RE LLC ("GMAC RE"), a reinsurance managing general agent writing business on behalf of Motors Insurance Corporation ("Motors") and the renewal rights for the business written through GMAC RE (which was subsequently renamed Maiden Re Insurance Services, LLC ("Maiden Re"));

 

·	GMAC Direct Insurance Company ("GMAC Direct") (which was subsequently renamed Maiden Reinsurance Company); and

 

·	Integon Specialty Insurance Company ("Integon") (which was subsequently renamed Maiden Specialty Insurance Company).

 

In conjunction with the acquisition of GMAC RE, on October 31, 2008, the Company and Motors entered into a Portfolio Transfer and Quota Share Reinsurance Agreement ("Motors Agreement") under which the Company reinsures (i) all of the existing contracts written by GMAC RE pursuant to a loss portfolio transfer and (ii) contracts written pursuant to a fronting arrangement with Motors. According to the loss portfolio transfer provisions of the Motors Agreement, the Company assumed the loss reserves of $755.6 million associated with the GMAC RE business as of October 31, 2008. The Company also assumed unearned premium of approximately $169.9 million. As a result of assumption of these liabilities, the Company initially received cash and investments of approximately $956.3 million from Motors. The Company now assumes one hundred percent (100%) of all premiums and losses for which Motors is otherwise entitled to or liable in respect of the reinsurance contracts.

 

To support the businesses acquired in the GMAC Acquisition and Maiden Holdings North America, Ltd. (“Maiden NA”), on January 20, 2009, we completed the TRUPS Offering of approximately $260.1 million in the form of junior subordinated debentures (the "Debentures") issued by Maiden Capital Financing Trust, a trust established by Maiden NA, and also issued 11,700,000 common shares to the purchasers. The Debentures mature in 2039 and carry an interest rate of 14%. Approximately 61% of these securities were placed privately with two of our Founding Shareholders (Michael Karfunkel and George Karfunkel), and the remainder with existing institutional investors.

 

ACAC Transaction

 

In November 2009, we announced an agreement in principal with American Capital Acquisition Corporation ("ACAC") regarding a multi-year 25% quota share agreement expected to generate over $200 million in annual revenue. The contract commenced on March 1, 2010 after final regulatory approval and the closing of ACAC's acquisition of GMACI Holdings, LLC U.S. consumer property and casualty insurance business, as well as a small amount of commercial auto business. This business generated over $1.0 billion in net written premium in each of 2008 and 2009. ACAC is owned by one of our Founding Shareholders, Michael Karfunkel, and the Michael Karfunkel 2005 Grantor Retained Annuity Trust (the “Trust"), which is controlled by Michael Karfunkel. The Trust currently owns 72.4% of ACAC's issued and outstanding common stock, Michael Karfunkel currently owns 27.6% of ACAC's issued and outstanding common stock, and AmTrust owns preferred shares convertible into 21.25% of the issued and outstanding common stock of ACAC.

 

As noted, management of this business will be treated as a separate segment captioned ACAC Quota Share.

 

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2010 Financial Highlights

 

2010 Consolidated Results of Operations

 

·	Net income available to common shareholders of $13.6 million, or $0.19 basic and diluted earnings per share compared to $13.1 million or $0.19 basic and diluted earnings per share for the same period in 2009

 

·	Operating earnings of $16.2 million, or $0.23 basic and diluted operating earnings per share compared to $16.8 million or $0.25 basic and diluted operating earnings per share in 2009(1)

 

·	Gross premiums written of $327.4 million

 

·	Net premiums earned of $263.9 million

 

·	Underwriting income of $9.9 million and combined ratio of 97.1% compared to $11.1 million and 95.4%, respectively for the same period in 2009(1)

 

·	Net investment income of $17.6 million

 

2010 Consolidated Financial Condition

 

·	Annualized operating return on equity of 9.4% as compared to 13.0% for the same period in 2009(1)

 

·	Common shareholders' equity of $710.0 million; book value per common share of $10.10

 

·	Total investments of $1.7 billion; fixed maturities and short-term securities comprise 99.7% of total investments, of which 65.0% have a credit rating of AAA and an overall average credit rating of AA

 

·	Total assets of $2.7 billion

 

·	Reserve for losses and loss expenses of $1.05 billion

 

·	Total debt of $215.1 million and a debt to total capitalization ratio of 23.3%

 

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(1)	Operating earnings, operating earnings per share, underwriting income, combined ratio and book value per share arc non-GAAP financial measures. Sec "Non-GAAP Financial Measures" for additional information and a reconciliation to the nearest GAAP financial measure (net income).

 

Non-GAAP Financial Measures

 

In presenting the Company's results, management has included and discussed certain non-GAAP financial measures. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company's results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company's business. However these measures should not be viewed as a substitute for those determined in accordance with GAAP. These non-GAAP measures are:

 

Operating Earnings and Operating Earnings per Share:  In addition to presenting net income determined in accordance with GAAP, we believe that showing operating earnings enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance.  Operating earnings should not be viewed as a substitute for GAAP net income. Operating earnings are an internal performance measure used in the management of our operations and represents operating results excluding, as applicable, realized investment gains or losses, foreign exchange gain or loss, the amortization of intangible assets and deferred tax expenses.  We exclude net realized investment gains or losses and foreign exchange gain or loss as we believe that both are heavily influenced in part by market opportunities and other factors. We do not believe amortization of intangible assets are representative of our ongoing business. We believe all of these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in our operations. The following is a reconciliation of operating earnings to its most closely related GAAP measure, net income.

 

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		For the Three Months Ended March 31
		2010				2009
		($ in Millions)
Net income		$	13.6			$	13.1
Add (subtract):
Net realized investment (gains) losses			(0.3	)			1.9
Amortization of intangibles			1.4				1.6
Foreign exchange and other (gains) losses			1.2				0.2
Deferred tax expense			0.3				—
Operating earnings		$	16.2			$	16.8
Operating earnings per common share:
Basic and diluted operating earnings per share		$	0.23			$	0.25

 

Underwriting Income and Combined Ratio: The combined ratio is used in the insurance and reinsurance industry as a measure of underwriting profitability. The combined ratio is the sum of the loss and loss expense ratio and the expense ratio. A combined ratio under 100% indicates underwriting profitability, as the total losses and loss expenses, acquisition costs and general and administrative expenses are less than the premiums earned on that business. We have generated underwriting income in each year since our inception. Underwriting income is calculated by subtracting losses and loss adjustment expenses, commissions and other acquisition expenses and applicable general and administrative expenses from the net earned premium and is the monetized counterpart of the combined ratio. While an important metric of success, underwriting income and combined ratio do not reflect all components of profitability, as it does not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments arc ultimately paid to clients. Please refer to Relevant Factors for further information on the components and computation of combined ratio.

 

Operating Return on Equity ("Operating ROE"): Management uses operating return on average shareholders' equity as a measure of profitability that focuses on the return to common shareholders. It is calculated using operating earnings available to common shareholders (realized gains or losses on investments, foreign exchange gain and other (gains) losses, amortization of intangibles, and amortization of intangible assets) divided by average common shareholders' equity. Management has set as a target a long-term average of 15% Operating ROE, which management believes provides an attractive return to shareholders for the risk assumed. Operating ROE for the three months ended March 31, 2010 and 2009 is computed as follows:

 

		2010				2009
		($ in Millions)
Operating earnings		$	16.2			$	16.8
Opening shareholders’ equity		$	676.5			$	509.8
Ending shareholders’ equity		$	710.0			$	547.4
Average shareholders’ equity		$	693.2			$	528.6
Operating return on equity			2.3	%			3.2	%
Annualized operating return on equity			9.4	%			13.0	%

 

Book Value per Share: Management uses growth in book value per share as a prime measure of the value the Company is generating for its common shareholders, as management believes that growth in the Company's book value per share ultimately translates into growth in the Company's stock price. Book value per share is calculated using common shareholders' equity divided by the number of common shares outstanding. Book value per share is impacted by the Company's net income and external factors such as interest rates, which can drive changes in unrealized gains or losses on its investment portfolio.  Book value per share as of March 31, 2010 and December 31, 2009 is computed as follows:

 

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		March 31, 2010				December 31, 2009
		($ in Millions)
Ending shareholders’ equity		$	710.0			$	676.5
Common shares outstanding			70,291,757				70,291,289
Book value per share		$	10.10			$	9.62

 

Relevant Factors

 

Revenues

 

We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, arc known.

 

The Company's revenues also include income generated from its investment portfolio. The Company's investment portfolio is comprised of fixed maturity investments, short term investments and other investments that are held as available for sale. In accordance with GAAP, these investments are carried at fair market value and unrealized gains and losses on the Company's investments are generally excluded from earnings. These unrealized gains and losses are included on the Company's balance sheet in accumulated other comprehensive (loss) income as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporarily impaired, such losses are included in earnings as a realized loss.

 

Expenses

 

Our expenses consist largely of net losses and loss expenses, commissions and other acquisition costs, general and administrative expenses, amortization of intangible assets and foreign exchange gains or losses. Net losses and loss expenses incurred arc comprised of three main components;

 

·	losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers;

 

·	change in outstanding loss or case reserves, which represent management's best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and

 

·

change in Incurred but Not Reported (“IBNR”) reserves, which are reserves established by us for changes in the values of claims that have been reported to us but are not yet settled, as well as claims that have occurred but have not yet been reported. The portion recoverable from reinsurers is deducted from the gross estimated loss.

 

Acquisition costs are comprised of commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business and can, in certain instances, vary based on loss sensitive features of reinsurance contracts. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of acquisition costs relating to unearned premiums and (3) including the amortization of previously deferred acquisition costs.

 

General and administrative expenses include personnel expenses including share-based compensation charges, rent expense, professional fees, information technology costs and other general operating expenses. We are experiencing increases in general and administrative expenses resulting from additional staff, increased share-based compensation expense, increased rent expense for our offices and increased professional fees. As the Company continues to expand and diversify in 2010, particularly through the ACAC Transaction and other initiatives across both its US and Bermuda platforms, we expect this trend to continue.

 

Combined Ratio Components

 

Management measures underwriting results on an overall basis and for each segment on the basis of the "combined ratio." The "combined ratio" is the sum of the loss and loss expense ratio and expense ratio. The individual components of the combined ratio include the "loss and loss expense ratio," "acquisition cost ratio," and the "general and administrative expense ratio." Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment's proportional share of gross premiums written. The "loss and loss expense ratio" is derived by dividing net losses and loss expenses by net premiums earned. The "acquisition cost ratio" is derived by dividing acquisition costs by net premiums earned. The "general and administrative expense ratio" is derived by dividing general and administrative expenses by net premiums earned. The "expense ratio" is the sum of the acquisition cost ratio and the general and administrative expense ratio.

 

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Critical Accounting Policies

 

It is important to understand our accounting policies in order to understand our financial position and results of operations. The Company's Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that Management believes are the most critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ significantly from the underlying assumptions and estimates used by Management, there could be material adjustments to prior estimates that could potentially adversely affect the Company's results of operations, financial condition and liquidity. These critical accounting policies and estimates should be read in conjunction with the Company's Notes to Consolidated Financial Statements, including Note 2, Significant Accounting Policies, for a full understanding of the Company's accounting policies.  For a detailed discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.  There were no material changes in the application of our critical accounting estimates subsequent to that report.

 

 

 

		March 31, 2010												December 31, 2009
		Cash & Equivalents				Fixed Maturities				Total				Cash & Equivalents				Fixed Maturities				Total
		($ in Millions)												($ in Millions)
Maiden US		$	29.4			$	341.0			$	370.4			$	38.6			$	258.9			$	297.5
Maiden Bermuda			77.3				618.2				695.5				94.8				776.3				871.1
Total Diversified Reinsurance Segment			106.7				959.2				1,065.9				133.4				1,035.2				1,168.6
Maiden Bermuda			11.0				235.1				246.1				11.5				195.5				207.0
Total AmTrust Quota Share Segment			11.0				235.1				246.1				11.5				195.5				207.0
Total		$	117.7			$	1,194.3			$	1,312.0			$	144.9			$	1,230.7			$	1,375.6

 

As part of the AmTrust Quota Share, Maiden Bermuda has also loaned funds totaling $168.0 million as of March 31, 2010 and December 31, 2009, respectively, to AII to satisfy collateral requirements. In addition, Maiden Bermuda has outstanding letters of credit totaling $24.2 million and $19.6 million as of March 31, 2010 and December 31, 2009, respectively.

 

Collateral arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Both our trust accounts and letter of credit are fully collateralized by assets held in custodial accounts. Although the investment income derived from our assets while held in trust accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities or the investment regulations of the state or territory of domicile of the ceding insurer, which may be more restrictive than the investment regulations applicable to us under Bermuda law. The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability.

 

We do not currently anticipate that the restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or to collateralize the letter of credit facilities will have a material impact on our ability to carry out our normal business activities, including, our ability to make dividend payments on our common shares.

 

 

Off-Balance Sheet Transactions

 

We have no off-balance sheet arrangements or transactions with unconsolidated, special purpose entities.