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)

		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

 

 

		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

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

1.	Basis of Presentation — Summary of Significant Accounting Policies

 

 

 

2.	Recent Accounting Pronouncements

 

		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

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.

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		Number of Share Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
Outstanding, December 31, 2007			716,000		$	10.00			9.1 years
Granted			246,000			10.00			9.46 years
Exercised			-			-
Cancelled			-			-
Outstanding, September 30, 2008			962,000		$	10.00			9.01 years

 

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	)

 

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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

 

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		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:

		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
		Total			% of Total			Total			% of Total			Total			% of Total			Total			% of Total
Gross and net premiums written
Reinsurance - AmTrust Quota Share
Workers Compensation		$	30,174			29.39	%	$	78,913			41.36	%	$	103,231			29.18	%	$	78,913			41.36	%
Specialty Middle Market Property & Casualty			9,091			8.85	%		27,229			14.27	%		30,572			8.64	%		27,229			14.27	%
Specialty Risk and Extended Warranty			49,844			48.54	%		84,659			44.37	%		119,519			33.79	%		84,659			44.37	%
Unitrin Business Insurance (UBI)			13,564			13.22	%		-			-			100,368			28.39	%		-			-
Total Reinsurance - AmTrust Quota Share		$	102,673			100.00	%	$	190,801			100.00	%	$	353,690			100.00	%	$	190,801			100.00	%
Reinsurance - Other			10,514			-			-			-			33,180			-			-			-
		$	113,187			100.00	%	$	190,801			100.00	%	$	386,870			100.00	%	$	190,801			100.00	%
Gross and net premiums earned
Reinsurance - AmTrust Quota Share
Workers Compensation		$	32,156			29.10	%	$	28,870			45.85	%	$	96,440			38.49	%	$	28,870			45.85	%
Specialty Middle Market Property & Casualty			10,961			9.91	%		8,057			12.80	%		30,265			12.08	%		8,057			12.80	%
Specialty Risk and Extended Warranty			29,657			26.84	%		26,039			41.35	%		72,661			29.00	%		26,039			41.35	%
Unitrin Business Insurance (UBI)			37,721			34.15	%		-			-			51,165			20.43	%		-			-
Total AmTrust Quota Share		$	110,495			100.00	%	$	62,966			100.00	%	$	250,531			100.00	%	$	62,966			100.00	%
Reinsurance - Other			3,100			-			-			-			5,708			-			-			-
		$	113,595			100.00	%	$	62,966			100.00	%	$	256,239			100.00	%	$	62,966			100.00	%

 

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10.	Subsequent Events

a)

On October 14, 2008, a hedge fund that the Company had invested in decided to close and liquidate its investments and return cash to shareholders in stages over an 18 month period. The fund was also a shareholder in the Company, we agreed to receive our shares from the fund, in lieu of the cash that the Company would have received upon the redemption of 90% of its investment in the fund. As a result of this transaction the Company received 962,336 shares at the valuation price of $3.95 per share. The Company will be holding these shares as Treasury Shares.

b)

On November 3, 2008, the Company acquired the reinsurance operations of GMAC Insurance (GMACI), including its book of assumed reinsurance business. As part of the transaction the Company’s wholly owned subsidiary Maiden Holdings North America, Ltd. (“Maiden NA”) acquired GMAC RE LLC, the reinsurance managing general agent writing business on behalf of Motors Insurance Corporation and the renewal rights for the business written by GMAC RE for approximately $100 million, which was paid in cash. The Company’s wholly owned subsidiary, Maiden Insurance has assumed the outstanding loss reserves associated with the GMAC RE business (approximately $750 million as of September 30, 2008) along with unearned premium of around $200 million.

In connection with the transaction Maiden NA also entered into an agreement to acquire two licensed insurance companies, GMAC Direct Insurance Company (“GMAC Direct”) and Integon Specialty Insurance Company (“Integon”). Consummation of the acquisition of these insurance companies is subject to regulatory approval. The consideration for GMAC Direct is $5.0 million plus an amount equal to the policyholders’ surplus as of the closing date and for Integon it is $3.2 million plus an amount equal to the policyholders’ surplus as of the closing date.

Maiden Insurance received approximately $402.6 million in cash and $544.7 million in US government and agencies fixed maturity investments in trust accounts for the benefit of the cedents as the initial transfer amounts in connection with the transaction. Within 30 days of the closing the actual amounts as of the closing date shall be calculated and if different from the initial amounts a further transfer will be received or paid by Maiden Insurance.

In support of the transaction the Company plans to raise additional equity of approximately $260 million through a rights offering to existing shareholders. Should the rights offering generate less than the planned $260 million the founding shareholders have committed equity funds which will be utilized as a backstop up to the full $260 million.

c)	On November 12, 2008, the Company’s Board of Directors approved a quarterly cash dividend of $0.05 per common share. This dividend is payable January 15, 2009 to shareholders of record on January 2, 2009.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and similar expressions are references to Maiden Holdings and its consolidated subsidiary.

The following is a discussion and analysis of our results of operations for the three and nine month periods ended September 30, 2008 and our financial condition as of September 30, 2008. This discussion and analysis should be read in conjunction with the attached unaudited interim consolidated financial statements and related notes and the audited consolidated financial statements and related notes contained in our 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.

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). We intend that the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 apply to these forward-looking statements. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These forward looking statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions. Factors that could cause such forward-looking statements not to be realized (which are described in more detail included or incorporated by reference herein and in other documents filed by us with the SEC) include, but are not limited to:

 

•

claims development;

•

general economic conditions and conditions specific to the reinsurance markets in which we operate;

•

pricing competition;

•

rating agency policies and practices;

•

catastrophic events;

•

material fluctuations in interest rates;

•

tax and regulatory changes and conditions; and

•

loss of key executives.

Other factors, such as changes in U.S. and global debt markets resulting from general economic conditions, market disruptions and significant interest rate fluctuations and changes in credit spreads, may adversely impact our investments or impede our access to, or increase the cost of, financing our operations. We caution that the foregoing list of important factors is not intended to be, and is not, exhaustive. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. If one or more risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements in this Form 10-Q reflect our current view with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph.

Our policy is to communicate events that we believe may have a material adverse impact on the Company’s operations or financial position, in a timely manner through a public announcement. It is also our policy not to make public announcements regarding events that we believe have a non-material impact to the Company’s operations or financial position based on management’s estimates and current information, other than through regularly scheduled calls, press releases or filings.

Overview

We are a Bermuda holding company organized to provide reinsurance business solutions to the property and casualty industry through Maiden Insurance, our reinsurance company subsidiary incorporated and licensed as a Class 3 insurer in Bermuda. Our solutions include quota share reinsurance as well as excess of loss reinsurance.

We offer our products to small specialty property and casualty insurance companies located in the United States and Europe that are seeking to efficiently manage their capital. We may also reinsure other reinsurers of U.S. and European specialty property and casualty insurance business that have similar objectives. We also conduct business with managing general agents in the United States and Europe that manage programs that fit our expertise in specialty insurance as well as Lloyd’s syndicates and program administrators. We may on occasion, make strategic investments in some of our clients in order to enable those clients to expand their business and therefore the amount of business they do with us. We do not currently hold any such investments.

We manage our business through two operating segments; Reinsurance - Amtrust Quota Share and Reinsurance - Other.

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Reinsurance - AmTrust Quota Share

We entered into a quota share reinsurance agreement with AmTrust’s Bermuda reinsurance subsidiary, AII, which provides quota share reinsurance to AmTrust’s insurance company subsidiaries. We also entered into a master agreement with AmTrust pursuant to which we will cause Maiden Insurance, and AmTrust will cause its insurance company subsidiaries, through AII, to reinsure 40% of all business (net of reinsurance with unaffiliated reinsurers) of the types written, as of the effective date of the master agreement, by the insurance subsidiaries and Maiden Insurance will have an option to reinsure any new types of business that they may write. Effective as of July 1, 2007, we reinsure 40% of all business (net of reinsurance with unaffiliated reinsurers) written by AmTrust’s insurance company subsidiaries that is subject to the reinsurance agreement. In addition, we also assumed through AII, effective as of July 1, 2007, 40% of the unearned premium reserve of AmTrust’s insurance subsidiaries (and the corresponding loss exposure). Maiden Insurance pays AII a ceding commission of 31% based on ceded written premiums. The reinsurance agreement has an initial term of three years and will be extended for further terms of three years unless either party elects not to renew.

On June 11, 2008, the Company and AmTrust amended the quota share 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 Insurance 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 agreed to cede to Maiden 40% of net premium written, effective as of June 1, 2008. Maiden Insurance will pay AmTrust a ceding commission of 34.375% on the unearned premium cession and the Retail Commercial Package Business.

We also entered into a reinsurance brokerage agreement with a subsidiary of AmTrust pursuant to which we receive reinsurance brokerage services in exchange for a fee of 1.25% of all premiums we reinsure from AmTrust. The Company recorded approximately $1.3 million and $3.0 million of reinsurance brokerage expense for the three month and nine month period ended September 30, 2008, respectively.

Reinsurance - Other

We continue to see increased flow of submission of reinsurance opportunities. Reinsurance intermediaries are the primary source of these opportunities. We have adopted a disciplined underwriting posture and thoroughly review all reinsurance opportunities before determining whether to participate. Between November 6, 2007 and November 6, 2008, we have received 344 reinsurance submissions. We have entered into fifteen reinsurance agreements for business other than the Quota Share Agreement with AmTrust with a gross premium written of $33.2 million. These contracts are, by gross premium written, 69% quota share and 31% excess of loss. By line of risk the split is 30% workers’ compensation, 13% auto liability and 57% is specialty risk and general liability.

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 $0.4 million and $0.8 million as expense, which is included in other operating expenses, for the three and nine months ended September 30, 2008.

On November 3, 2008, the Company acquired the reinsurance operations of GMAC Insurance (GMACI), including its book of assumed reinsurance business. As part of the transaction the Company’s wholly owned subsidiary Maiden Holdings North America, Ltd. (“Maiden NA”) acquired GMAC RE LLC, the reinsurance managing general agent writing business on behalf of Motors Insurance Corporation and the renewal rights for the business written by GMAC RE for approximately $100 million, which was paid in cash. The Company’s wholly owned subsidiary, Maiden Insurance has assumed the outstanding loss reserves associated with the GMAC RE business (approximately $750 million as of September 30, 2008) along with unearned premium of around $200 million.

In connection with the transaction Maiden NA also entered into an agreement to acquire two licensed insurance companies, GMAC Direct Insurance Company (“GMAC Direct”) and Integon Specialty Insurance Company (“Integon”). Consummation of the acquisition of these insurance companies is subject to regulatory approval. The consideration for GMAC Direct is $5.0 million plus an amount equal to the policyholders’ surplus as of the closing date and for Integon it is $3.2 million plus an amount equal to the policyholders’ surplus as of the closing date.

Maiden Insurance received approximately $402.6 million in cash and $544.7 million in US government and agencies fixed maturity investments in trust accounts for the benefit of the cedents as the initial transfer amounts in connection with the transaction. Within 30 days of the closing the actual amounts as of the closing date shall be calculated and if different from the initial amounts a further transfer will be received or paid by Maiden Insurance.

In support of the transaction the Company plans to raise additional equity of approximately $260 million through a rights offering to existing shareholders. Should the rights offering generate less than the planned $260 million the founding shareholders have committed equity funds which will be utilized as a backstop up to the full $260 million.

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Principal Revenue and Expense Items

Revenues

Premium Income. We derive our revenue primarily from premiums assumed on reinsurance contracts net of any inuring reinsurance. Reinsurance premiums assumed are estimated based on reports and other information provided by brokers and ceding companies, supplemented by the Company's own estimates of premiums where reports have not been received or in cases where the amounts reported by brokers and ceding companies are adjusted to reflect management's best judgments and expectations. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned on a basis consistent with the terms of the underlying related insurance contracts.

Investment Income. These include income from our investment portfolio, comprising net investment income and net realized gains and losses. Investment income is principally derived from interest earned on investments, partially offset by investment management fees and fees paid to our custodian bank. Net realized gains or losses include net realized investment gains or losses from the sale of investments.

Expenses

In our consolidated results, expenses consist of loss and loss adjustment expenses, commission and other acquisition expenses, salaries and benefits and operating expenses. Depending on the terms of the reinsurance agreements that we negotiate, our expenses may also include excise taxes, which are calculated as a percentage (1% for purposes of United States federal excise tax (“FET”)) of premiums ceded to us. Under our quota share reinsurance agreement with AmTrust, all payments of FET are the responsibility of AmTrust.

Loss and Loss Adjustment Expenses. We establish loss and loss adjustment expense reserves in an amount equal to our estimate of the ultimate liability for claims under our reinsurance policies and the cost of adjusting and settling those claims. Our provision for loss and loss adjustment expense reserves in any period will include estimates for losses incurred (that is, the total sustained by us under policies, whether paid or unpaid) during such period and changes in estimates for prior periods.

Commission and Other Acquisition Expenses. These expenses include ceding commissions and other acquisition costs. Acquisition costs consist of ceding commission and, reinsurance broking expense. These costs are expected to be capitalized and amortized as an expense as the premiums are earned on the treaties to which they pertain.

Maiden Insurance pays ceding commissions to other insurance companies, including AmTrust, for the reinsurance premiums that we assume. Ceding commissions are intended to compensate the ceding company for the costs incurred to acquire the ceded business. Ceding commissions are typically paid on traditional quota share reinsurance agreements, but not on excess of loss reinsurance agreements.

Under our quota share reinsurance agreement with AII, except for the Retail Commercial Package Business, we pay a ceding commission of 31% calculated as a percentage of ceded premiums. On the Retail Commercial Package Business, we pay to AmTrust a ceding commission of 34.375%.

Reinsurance brokerage expense includes the 1.25% reinsurance brokerage fee that we pay to an AmTrust subsidiary on all reinsurance ceded by AmTrust as well as other reinsurance brokerage fees and commission expense we may incur to other intermediaries.

Salaries and benefits. These payments comprise officers and employees salaries and related costs.

Foreign exchange gain/loss. These comprise exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were previously translated.

Other Operating Expenses. Other operating expenses consist of other expenses related to our operations. Other operating expenses consist of general & administrative expenses such as fees payable to IGI under the brokerage services agreement, professional fees, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately.

Ratios

    

Management measures results for each segment on the basis of the “net loss ratio,” “net expense ratio,” and the “net combined ratio”.

Net Loss Ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company's business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.

Net Expense Ratio. The net expense ratio is a measure of an insurance company's operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of ceding commissions, policy acquisition expenses, salaries and benefits, foreign exchange gain/loss and other operating expenses to net premiums earned.

 

Net Combined Ratio. The net combined ratio is a measure of an insurance company's overall underwriting profit. This is the sum of the net loss and net expense ratios. If the net combined ratio is at or above 100%, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.

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