Item 1. Financial Statements

 

MAIDEN HOLDINGS, LTD.

CONSOLIDATED BALANCE SHEETS

(in thousands (000’s), except per share data)

 

		(unaudited)
		March 31, 2008			December 31, 2007
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $609,063; $488,765)		$	581,890		$	474,789
Other investments, at fair value (cost $15,199; $15,176)			12,383			15,656
Total investments			594,273			490,445
Cash and cash equivalents			43,004			35,729
Accrued investment income			5,212			3,204
Reinsurance balances receivable, net (primarily with related parties - see note 8)			79,980			27,990
Loan to related party (see note 8)			113,542			113,542
Prepaid expenses and other assets			447			454
Deferred commission and other acquisition costs (primarily with related parties - see note 8)			58,674			44,215
Furniture and equipment, net			64			29
Total Assets		$	895,196		$	715,608
Liabilities and Shareholders’ Equity
Liabilities
Loss and loss adjustment expense reserves (primarily with related parties - see note 8)		$	61,648		$	38,508
Unearned premiums (primarily with related parties - see note 8)			174,293			137,166
Accrued expenses and other liabilities			4,056			2,589
Due to broker			22,450			-
Securities sold under agreements to repurchase, at contract value			102,172			-
Total Liabilities			364,619			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			529,834			529,647
Accumulated other comprehensive loss			(29,989	)		(13,496	)
Retained earnings			30,136			20,598
Total Shareholders’ Equity			530,577			537,345
Total Liabilities and Shareholders’ Equity		$	895,196		$	715,608

See accompanying notes to the unaudited consolidated financial statements.

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In May 2008, the Financial Accounting Standards Board (“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, 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 toAU 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, 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.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented. The Company does not have a noncontrolling interest in one or more subsidiaries. The Company does not believe the adoption will have a material impact on its financial condition or results of operations.

 

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In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, SFAS No. 141(R) will be applied by the Company to business combinations occurring on or after January 1, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. Under SFAS 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 was effective for the Company beginning in the first quarter of fiscal 2008. We chose not elect the fair value option. Therefore, the adoption of SFAS No. 159 in the first quarter of fiscal 2008 did not impact our consolidated financial position, results of operations or cash flows.

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 March 31, 2008 and December 31, 2007, are as follows:

 

(a) Available-for-Sale Fixed Maturities and Other Investments

March 31, 2008		Original or amortized cost			Gross unrealized gains			Gross unrealized losses			Fair value
Fixed Maturities:
U.S. Agency - mortgage backed securities		$	283,500		$	4,930		$	(621	)	$	287,809
Corporate fixed maturities			325,563			340			(31,822	)		294,081
Total available for sale fixed maturities			609,063			5,270			(32,443	)		581,890
Other investments			15,199			-			(2,816	)		12,383
Total investments		$	624,262		$	5,270		$	(35,259	)	$	594,273

December 31, 2007		Original or amortized cost			Gross unrealized gains			Gross unrealized losses			Fair value
Fixed Maturities:
U.S. Agency - mortgage backed securities		$	204,363		$	660		$	-		$	205,023
Corporate fixed maturities			284,402			445			(15,081	)		269,766
Total available for sale fixed maturities			488,765			1,105			(15,081	)		474,789
Other investments			15,176			480			-			15,656
Total investments		$	503,941		$	1,585		$	(15,081	)	$	490,445

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(b) Investment Income

 

Net investment income was derived from the following sources:

		For the Three Months Ended March 31, 2008
Fixed maturities		$	6,555
Cash and cash equivalents			576
Loan to related party			1,351
			8,482
Less:
Investment expenses			(497	)
Interest expense on securities sold under agreements to repurchase			(376	)
		$	7,609

 

(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 March 31, 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 ended March 31, 2008 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 March 31, 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		$	154,897			(621	)		-			-		$	154,897			(621	)
Corporate fixed maturities			279,339			(31,822	)		-			-			279,339			(31,822	)
			434,236			(32,443	)		-			-			434,236			(32,443	)
Other investments		$	12,383			(2,816	)	$	-			-		$	12,383			(2,816	)
Total temporarily impaired available-for-sale securities and other investments		$	446,619		$	(35,259	)	$	-		$	-		$	446,619		$	(35,259	)

(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 March 31, 2008, there were $102,172 principal amount outstanding at interest rates between 2.6% and 3.26%. Interest expense associated with these repurchase agreements for the three months ended March 31, 2008 was $376 of which $126 was accrued as of March 31, 2008. The Company has approximately $102,172 of collateral pledged in support of these agreements.

 

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.

 

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·

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.

 

In accordance with SFAS 157, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

Investments available for sale. Investments available for sale are recorded at fair value on a recurring basis and include fixed maturities and securities sold under agreements to repurchase. Fair value of investments is measured based upon quoted prices in active markets, if available. If quoted prices in active markets are not available, fair values are measured by an independent pricing service that utilizes valuation techniques based upon observable market data. Level 1 investments include those traded on an active exchange, such as the NASDAQ. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the independent pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information. These investments are classified as Level 2 investments and include obligations of U.S. government agencies, corporate debt securities and other mortgage backed securities.

 

Other investments. Other investments consist primarily of hedge funds where the fair value estimate is determined by an external 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 other investments in the amount disclosed in Level 3.

 

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 March 31, 2008:

		Total			Level 1			Level 2			Level 3
Assets:
Available-for-sale fixed maturities		$	581,890		$	-		$	581,890		$	-
Other investments			12,383			-			-			12,383
		$	594,273		$	-		$	581,890		$	12,383
Liabilities:
Securities sold under agreements to repurchase, at contract value			102,172			-			102,172			-
		$	102,172		$	-		$	102,172		$	-

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of March 31, 2008:

 

		Other investments			Total
Beginning balance as of January 1, 2008		$	15,656		$	15,656
Total net losses for the three months included in:
Net income			-			-
Other comprehensive loss			(3,296	)		(3,296	)
Purchases, sales, issuances and settlements, net			23			23
Net transfers into (out of) Level 3			-			-
Ending balance as of March 31, 2008		$	12,383		$	12,383

 

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5.	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, 2008
Net income available to common shareholders		$	12,516
Weighted average number of common shares outstanding - basic			59,550,000
Potentially dilutive securities:
Warrants			-
Share options			-
Weighted average number of common shares outstanding - diluted			59,550,000
Basic and diluted earnings per common share:		$	0.21

 

As of March 31, 2008, the total weighted-average of 4,050,000 warrants and 793,700 share options were excluded from diluted earnings per share as they were anti-dilutive.

 

6.	Share Based Compensation

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 $187 for the three months ended March 31, 2008.

 

The Company awarded options during the three months ended March 31, 2008. 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. 

 

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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 for the period three months ended March 31, 2008:

		Number of Share Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
Outstanding, December 31, 2007			716,000		$	10.00			9.6 years
Granted			167,000			10.00			9.9 years
Exercised			-			-
Cancelled			-			-
Outstanding, March 31, 2008			883,000		$	10.00			9.5 years

 

Dividends were declared on January 7, 2008. The Company’s Board of Directors approved quarterly cash dividends of $0.025 per common share payable to shareholders of record as of January 8, 2008 and April 1, 2008 respectively. The dividends were paid on January 15, 2008 and April 15, 2008.

 

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 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. The Company recorded approximately $19,774 of ceding commission expense for the three months ended March 31, 2008 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.

 

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The following is the effect on the Company’s balance sheet as of March 31, 2008 and December 31, 2007 and the results of operations for the three months ended March 31, 2008 related to the Reinsurance Agreements with AmTrust:

 

Assets and (liabilities):		March 31, 2008			December 31, 2007
Loan to related party		$	113,542		$	113,542
Reinsurance balances receivable, net			72,475			27,891
Accrued interest on loan to related party			1,591			240
Deferred commission cost			49,505			42,501
Loss and loss adjustment expense reserves			(61,221	)		(38,485	)
Unearned premiums			(160,517	)		(137,099	)

 

Results of operations:		Three months ended March 31, 2008
Net premium written - assumed		$	87,714
Change in unearned premium - assumed			(23,417	)
Net earned premium - assumed			64,297
Ceding commission on premium written			26,905
Ceding commission - deferred			(7,004	)
Ceding commission expensed			19,901
Loss and loss adjustment expense			37,399

 

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 loan at March 31, 2008 was $113,542 and the accrued interest was $1,591. 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 Agreement

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 $797 of reinsurance brokerage expense for the three months ended March 31, 2008 and deferred reinsurance brokerage of $1,953 as at March 31, 2008 as a result of this agreement.

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. The Company recorded approximately $458 of investment management fees for the three months ended March 31, 2008 as a result of this agreement.

 

9.

Segments

Item 6.  Exhibits

 

Exhibit Number		Description
31.1		Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2008.
31.2		Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2008.
32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended March 31, 2008.
32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended March 31, 2008.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Maiden Holdings, Ltd.
	(Registrant)
Date: June 19, 2008		/s/  Max G. Caviet
		Max G. Caviet President and Chief Executive Officer
		/s/  Michael J. Tait
		Michael J. Tait Chief Financial Officer

 

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