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 Quarterly
Report on Form 10-Q (this "Form 10-Q" or this "Report"). 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 "Maiden
Holdings" means Maiden Holdings, Ltd. only. Amounts in tables may not reconcile
due to rounding differences.
Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q includes 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 13, 2012. The projections and statements in this Report speak only as of
the date of this Report 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.
Introduction
Since our founding in 2007, we have entered into a series of significant
strategic transactions that have transformed the scope and scale of our business
while keeping our low volatility, non-catastrophe oriented risk profile intact.
These transactions have increased our annualized revenue to an amount in excess
of $1.7 billion while strongly positioning our capital both in the U.S. and
internationally. These transactions have included the AmTrust Quota Share, the
GMAC Acquisition, the TRUPS Offering and the ACAC Quota Share. More recent
significant developments have included:
• Acquiring the majority of the reinsurance-related infrastructure, assets
and liabilities of U.K.-based GMAC International Insurance Services, Ltd.
("IIS") in 2010 (the "IIS Acquisition"); and
• Completing a public debt offering of $107.5 million in June 2011 ("2011
Senior Notes") and repurchasing a like amount of our outstanding junior
subordinated debt in July 2011. The 2011 Senior Notes trade on the New
York Stock Exchange under the symbol "MHNA."
• Completing a public debt offering of $100.0 million in March 2012 ("2012
Senior Notes"). The 2012 Senior Notes trade on the New York Stock Exchange
under the symbol "MHNB." The net proceeds of $96.6 million have been used
for working capital and general corporate purposes.
Until such time as the Company attains sufficient historical experience,
year-to-year comparability is likely to be more difficult as compared with other
companies considered peers of the Company and with whom it competes on a regular
basis.
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 non-catastrophe 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 are
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 currently operate our business through three segments: Diversified
Reinsurance, AmTrust Quota Share Reinsurance and the ACAC Quota Share. As of
June 30, 2012, we had approximately $3.8 billion in total assets, $824.3 million
of shareholders' equity and $1.2 billion in total capital, which includes
shareholders' equity, senior notes and junior subordinated debt.
We provide reinsurance through our wholly owned subsidiaries, Maiden Reinsurance
Company ("Maiden US") and Maiden Insurance Company Ltd. ("Maiden Bermuda") and
have operations in the United States, Bermuda and Europe. 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. Internationally, we provide
reinsurance-related services through Maiden Global
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Holdings Ltd. ("Maiden Global") and its subsidiaries. Maiden Global primarily
focuses on providing branded auto and credit life insurance products through its
insurer partners to retail customers in the European Union and other global
markets, which also produce reinsurance programs which are underwritten by
Maiden Bermuda. Certain international credit life business is also written
directly by Maiden Life Försäkrings AB ("Maiden LF"), a wholly owned subsidiary
of Maiden Holdings, as part of Maiden Global's service offerings.
The market conditions in which we operate have historically been cyclical,
experiencing periods 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 report, the
reinsurance market has been characterized by significant competition in most
lines of business.
While natural and man-made catastrophes occur each year that affect reinsurance
industry results, in both 2010 and 2011 the insurance and reinsurance industry
experienced an extensive series of significant natural and man-made
catastrophes, both globally and in the U.S., that negatively impacted overall
industry performance. Consistent with our business model, the Company only
experienced modest losses from the 2010 and 2011 global catastrophe events.
However, the unusually high frequency of loss activity from U.S. thunderstorm
and tornado did impact our U.S clients in the second quarter of 2011, adversely
affecting the Company's results. Other U.S.-based catastrophe experience in 2011
and in the first six months of 2012 was within the Company's expected parameters
which are incorporated into the pricing of our Maiden US accounts. Despite this
elevated level of weather losses in the second quarter of 2011, consistent with
its operating model, Maiden maintained profitable underwriting results
throughout 2011.
In the first six months of 2012, meaningful global and U.S. catastrophe losses
declined from the levels of the past two years and industry financial results,
taken as a whole, have improved compared to 2010 and 2011. However, the property
and casualty industry invests significant portions of its premiums and retained
underwriting profits in fixed income maturities; yields on these securities have
continued to decline and are at historically low levels. Interest rates are
widely forecast to persist at such levels for the foreseeable future. Continued
existence of these conditions is likely to adversely impact the results of the
property and casualty industry generally, placing additional pressure on
companies underwriting results at a time that market conditions may not be
supportive of sustained, longer-term additional pricing measures which would
stabilize underwriting trends.
Despite the combined financial impact of these events, capital positions across
the insurance and reinsurance industry continue to appear to remain adequate at
present. Although the ultimate impact of recent catastrophe activity and the
fixed income investment environment remains unclear and is currently more
uncertain in light of reinsurance industry performance through the first half of
2012, broad industry conditions brought about by these events are potentially
supportive of improved pricing in the near term. However, the scope and tenure
of any improved pricing environment is less certain. As market conditions
continue to develop, we continue to maintain our adherence to disciplined
underwriting by declining business when pricing, terms and conditions do not
meet our underwriting standards. We believe that if such catastrophe events
continue at a high rate and the investment environment remains unfavorable, they
could have a significant positive effect on competition and pricing. We believe
we are well positioned to take advantage of market conditions should the pricing
environment become more favorable.
Recent Developments
Senior Notes Offerings
On June 24, 2011, the Company's wholly owned U.S. holding company subsidiary,
Maiden Holdings North America, Ltd. ("Maiden NA"), closed the offering of $107.5
million aggregate principal amount of 8.25% Senior Notes due June 15, 2041 (the
"2011 Senior Notes"), which are fully and unconditionally guaranteed by Maiden
Holdings. The 2011 Senior Notes are redeemable for cash, in whole or in part, on
or after June 15, 2016, at 100% of the principal amount of the 2011 Senior Notes
to be repurchased plus accrued and unpaid interest to but excluding the
redemption date.
Maiden NA has listed the 2011 Senior Notes on the New York Stock Exchange and
trading commenced on July 21, 2011 under the symbol "MHNA."
Total net proceeds from the offering were approximately $104.7 million, after
deducting the underwriting discount and offering expenses paid by Maiden NA and
the Company. The net proceeds were used to repurchase a portion of the TRUPS
Offering securities. The Company repurchased $107.5 million of junior
subordinated debt issued in the TRUPS Offering securities on July 15, 2011.
Pursuant to the terms of the TRUPS Offering, the Company incurred a
non-recurring repurchase expense of approximately $15.1 million, which was
reported in the Company's 2011 results of operations. The Company will save
approximately $6.2 million annually as a result of the refinancing, and
approximately $15.9 million from the closing of the 2011 Senior Notes offering
until January 20, 2014, the date on which the repurchase or redemption penalty
associated with the TRUPS Offering expires. As a result of the repurchase, the
Company also incurred an additional non-recurring non-cash charge of
approximately $20.3 million in 2011, which represents the accelerated
amortization of original issue discount and issuance costs associated with
equity issued in conjunction with the TRUPS Offering.
In March 2012, the Company, through Maiden NA, issued $100.0 million principal
amount of 8.00% Senior Notes ("2012 Senior Notes") due on March 27, 2042, which
are fully and unconditionally guaranteed by the Company. The 2012 Senior Notes
are redeemable for cash, in whole or in part, on or after March 27, 2017, at
100% of the principal amount to be redeemed plus accrued and unpaid interest to
but excluding the redemption date. The net proceeds from the 2012 Senior Notes
of $96.6 million has been used for working capital and general corporate
purposes.
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Maiden NA has listed the 2012 Senior Notes on the New York Stock Exchange and
trading commenced on March 29, 2012 under the symbol "MHNB."
IIS Acquisition
On November 30, 2010, we acquired the majority of the reinsurance-related
infrastructure, assets and liabilities of IIS. IIS is based in the United
Kingdom. The IIS Acquisition included the following primary components:
• A renewal rights agreement under which Maiden Bermuda underwrites certain
assumed reinsurance business written by GMAC International Insurance
Company, Ltd. ("GMAC IICL"), which covers primarily personal auto and
credit life coverages offered by primary insurers in association with
programs IIS designs and implements for original equipment automobile
manufacturers;
• The "IICL Agreement" under which Maiden Bermuda reinsures all of the
existing contracts written by GMAC IICL pursuant to a loss portfolio
transfer; under the purchase agreement, all future contracts are now
underwritten by Maiden Bermuda;
• The acquisition of GMAC VersicherungsService GmbH ("GMAC VS"), an
insurance producer based in Germany which supports sales of primary
personal auto insurance through participating automobile dealerships and
original equipment automobile manufacturers; and
• The acquisition of GMAC Life Försäkrings AB ("GMAC LF"), a credit life
insurer domiciled in Sweden which writes certain credit life insurance in
association through automobile financings offered through participating
automobile dealerships and original equipment automobile manufacturers and
which has been renamed Maiden LF.
According to the loss portfolio transfer provisions of the IICL Agreement, the
Company assumed the loss reserves of $98.8 million associated with the GMAC IICL
business as of November 30, 2010. The Company also assumed unearned premium, net
of acquisition costs, of approximately $19.5 million.
The substantial majority of the premiums and losses underwritten by GMAC IICL
are subject to collateral requirements in the form of letters of credit and
trust agreements. At the closing of the IIS Acquisition, the Company settled
cash balances applicable to the subject reinsurance contracts with GMAC IICL.
Actual assets in support of the liabilities assumed under the IICL Agreement
were transferred to the Company when the subject individual agreements were
novated to Maiden Bermuda. The substantial majority of subject contracts have
been novated as at June 30, 2012. Please refer to the section entitled "IIS
Acquisition - Funds Withheld" in the Liquidity and Capital Resources section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Form 10-Q for further information.
As a result of the assumption of these liabilities, at November 30, 2010, the
underlying assets in support of these collateral arrangements totaled $141.8
million. The Company now assumes one hundred percent (100%) of all premiums and
losses for which GMAC IICL is otherwise entitled to or liable in respect of the
reinsurance contracts.
We are paying a fee to GMAC IICL for the right to renew the expiring contracts,
subject to certain minimum payments at close, over a three-year period
commencing November 30, 2010.
The aggregate purchase price of GMAC VS and GMAC LF at November 30, 2010 was
$22.3 million, which was the tangible book value of each entity. All balances of
the IIS Acquisition were settled on an estimated basis and pursuant to the terms
of the underlying agreements, were subject to adjustment to the final actual
balances as at November 30, 2010 in the following year. In 2011, the total
consideration was reduced to $21.6 million.
On September 1, 2011, in exchange for a 10% interest in GMAC VS, we entered into
cooperation agreements with the VDOH Wirtschaftsdienst GmbH ("Opel Dealer
Association") in Germany and the German auto manufacturer Adam Opel AG ("Opel").
We also renamed GMAC VS "Opel Händler VersicherungsService GmbH" or "OVS". The
cooperation agreements with both organizations are designed to increase the
sales of OVS insurance products in Opel dealerships in Germany and increase fee
and other revenues for Opel, the Opel Dealer Association, and the Company via
OVS, respectively.
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Second Quarter and Six Months Ended June 30, 2012 Financial Highlights
Consolidated Results of Operations
• Net income attributable to Maiden shareholders of $14.5 million, or $0.20
basic and diluted earnings per share for the three months ended June 30,
2012 compared to a net loss of $24.4 million, or $0.34 basic and diluted
loss per share for the same period in 2011.
• Net income attributable to Maiden shareholders of $34.9 million, or $0.48
basic and diluted earnings per share for the six months ended June 30,
2012 compared to a net loss of $5.0 million, or $0.07 basic and diluted
loss per share for the same period in 2011.
• Operating earnings(1) of $19.7 million, or $0.27 basic and diluted
operating earnings per share(1) for the three months ended June 30, 2012
compared to $11.2 million, or $0.16 basic and $0.15 diluted earnings per
share for the same period in 2011.
• Operating earnings(1) of $39.1 million, or $0.54 basic and $0.53 diluted
operating earnings per share(1) for the six months ended June 30, 2012
compared to $31.0 million, or $0.43 basic and diluted earnings per share
for the same period in 2011.
• Gross premiums written of $445.2 million and $1,058.4 million for the
three and six months ended June 30, 2012, a 3.7% decrease and 13.4%
increase over the same periods in 2011, respectively.
• Net premiums earned of $437.1 million and $875.6 million for the three and
six months ended June 30, 2012, a 18.9% and 22.6% increase over the same
periods in 2011, respectively.
• Underwriting income(2) of $11.4 million and $23.5 million and a combined
ratio(2) of 97.9% for the three and six months ended June 30, 2012
compared to $4.2 million and $17.9 million and 99.8% and 98.4%,
respectively for the same periods in 2011.
• Net investment income of $20.1 million and $38.5 million for the three and
six months ended June 30, 2012, a 1.3% increase and 1.1% decrease over the
same periods in 2011, respectively.
Consolidated Financial Condition
• Annualized operating return on equity(1) of 9.9% for the six months ended
June 30, 2012 compared to 8.3% for the same period in 2011.
• Common shareholders' equity of $824.3 million; book value per common share
of $11.41.
• Total cash and investments of $2.5 billion; fixed maturities comprise
94.2% of total invested assets, of which 54.6% have a credit rating of AA+
or better and an overall average credit rating of AA-.
• Total assets of $3.8 billion.
• Reserve for loss and loss adjustment expenses of $1.5 billion.
• Total debt of $333.8 million and a debt to total capitalization ratio of
28.8%.
(1) Operating earnings, operating earnings per share and operating return on
equity are non-GAAP financial measures. See "Non-GAAP Financial Measures" for
additional information and a reconciliation to the nearest U.S. GAAP
financial measure (net income).
(2) Underwriting income and combined ratio are operating metrics. See "Non-GAAP
Financial Measures" for additional information.
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:
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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 on a
recurring basis, the following:
• Net realized and unrealized gains or losses on investment;
• Foreign exchange and other gains or losses;
• Amortization of intangible assets; and
• Non-cash deferred tax expenses;
We exclude net realized investment gains or losses and foreign exchange gains or
losses 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.
We also exclude certain non-recurring expenditures that are material to
understanding our results of operations, including the following:
• For 2011, we exclude transaction expenses related to the IIS Acquisition,
as these are non-recurring; and
• In 2011, we exclude the junior subordinated debt repurchase expense and
the accelerated amortization of junior subordinated debt discount and
issuance costs resulting from the 2011 Senior Notes offering.
The following is a reconciliation of operating earnings to its most closely
related GAAP measure, net income for the three and six months ended June 30,
2012 and 2011:
For the Three Months Ended June
30, For the Six Months Ended June 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Net income (loss) attributable to Maiden
shareholders $ 14.5 $ (24.4 ) $ 34.9 $ (5.0 )
Add (subtract):
Net realized and unrealized losses
(gains) on investment 2.9 (0.6 ) 1.5 (0.6 )
Foreign exchange losses (gains) 0.9 (0.9 ) (0.1 ) (2.0 )
Amortization of intangible assets 1.1 1.3 2.2 2.5
Junior subordinated debt repurchase
expense - 15.1 - 15.1
Accelerated amortization of junior
subordinated debt discount and issuance
cost - 20.3 - 20.3
Non-recurring general and administrative
expenses relating to IIS Acquisition - 0.1 - 0.1
Non-cash deferred tax expense 0.3 0.3 0.6 0.6
Operating earnings attributable to Maiden
shareholders $ 19.7 $ 11.2 $ 39.1 $ 31.0
Operating earnings per common share:
Basic operating earnings per share $ 0.27 $ 0.16 $ 0.54 $ 0.43
Diluted operating earnings per share $ 0.27 $ 0.15 $ 0.53 $ 0.43
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 (as defined above) 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 and six months
ended June 30, 2012 and 2011 is computed as follows:
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For the Three Months Ended June
30, For the Six Months Ended June 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Operating earnings attributable to Maiden
shareholders $ 19.7 $ 11.2 $ 39.1 $ 31.0
Opening Maiden shareholders' equity $ 810.4$ 769.7
$ 768.6 $ 750.2
Ending Maiden shareholders' equity $ 824.3 $ 759.3 $ 824.3 $ 759.3
Average Maiden shareholders' equity $ 817.4 $ 764.5
$ 796.5 $ 754.8
Operating return on equity 2.4 % 1.5 % 4.9 % 4.1 %
Annualized operating return on equity 9.7 % 5.9 % 9.9 % 8.3 %
The increase in Operating ROE for the three and six months ended June 30, 2012
compared to the same periods in 2011 is primarily the result of higher operating
earnings as a result of lower combined ratios in 2012. These improved results
were offset by strong growth in shareholders' equity resulting from the higher
earnings and increased other comprehensive income brought about by the $30.1
million increase in unrealized gains on the Company's investment portfolio for
the six months ended June 30, 2012.
Book Value per Share: Management uses growth in book value per share as a prime
measure of the value the Company is generating for its common shareholders, as
management believes that growth in the Company's book value per share ultimately
translates into growth in the Company's stock price. Book value per share is
calculated using common shareholders' equity divided by the number of common
shares outstanding. Book value per share is impacted by the Company's net income
and external factors such as interest rates, which can drive changes in
unrealized gains or losses on its investment portfolio. Book value per share as
at June 30, 2012 and December 31, 2011 is computed as follows:
June 30, 2012 December 31, 2011
($ in Millions)
Ending Maiden shareholders' equity $ 824.3 $ 768.6
Common shares outstanding 72,261,582 72,221,428
Book value per share $ 11.41 $ 10.64
The increase in Maiden shareholders' equity was due to net income for the six
months ended June 30, 2012 of $34.9 million, change in unrealized gains on
investments of $30.1 million and foreign currency translation adjustment of $1.4
million offset by dividends declared of $11.6 million.
Certain Operating Measures
Underwriting Income and Combined Ratio: The combined ratio is used in the
insurance and reinsurance industry as a measure of underwriting profitability.
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 the expense ratio and the computations of each
component are described below. 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 equivalent of the combined ratio.
For purposes of these operating measures, the fee-generating business associated
with the IIS Acquisition ("IIS Fee Business") which is included in the
Diversified Reinsurance segment, is considered part of the underwriting
operations of the Company. Certain portions of the IIS Fee Business are directly
associated with the underlying reinsurance contracts recorded in the Diversified
Reinsurance segment. To the extent that the fees are generated on underlying
insurance contracts sold to third parties that are then ceded under quota share
reinsurance contracts to Maiden Bermuda, a proportionate share of the fee is
offset against the related acquisition expense. To the extent that IIS Fee
Business is not directly associated with premium revenue generated under the
applicable reinsurance contracts, that fee revenue is separately reported on the
line captioned "Other insurance revenue" in the Company's Condensed Consolidated
Statements of Income.
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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 are ultimately paid to clients. 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 "net loss and loss expense ratio" is derived by dividing net losses and loss
expenses by the sum of net premiums earned and other insurance revenue. The
"commission and acquisition cost ratio" is derived by dividing acquisition costs
by the sum of net premiums earned and other insurance revenue. The "general and
administrative expense ratio" is derived by dividing general and administrative
expenses by the sum of net premiums earned and other insurance revenue. The
"expense ratio" is the sum of the commission and acquisition cost ratio and the
general and administrative expense ratio.
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, are known.
The Company's revenues also include fee income generated by the IIS Fee Business
as well as income generated from its investment portfolio. The Company's
investment portfolio is comprised of fixed maturity investments, held as
available-for-sale ("AFS"), and other investments that are held as AFS. In
accordance with U.S. GAAP, these investments are carried at fair market value
and unrealized gains and losses on the Company's investments held as AFS are
generally excluded from earnings. These unrealized gains and losses are included
on the Company's Condensed Consolidated Balance Sheet in accumulated other
comprehensive 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 loss and loss adjustment expenses,
commission and other acquisition expenses, general and administrative expenses,
amortization of intangible assets and foreign exchange and other gains or
losses. Net loss and loss adjustment expenses are 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 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.
Commission and other acquisition expenses 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. Commission and other acquisition expenses are reported
after (1) deducting commissions received on ceded reinsurance, (2) deducting the
part of commission and other acquisition expenses relating to unearned premiums
and (3) including the amortization of previously deferred commission and other
acquisition expenses.
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 depreciation expense for our fixed assets and increased
professional fees. As the Company continues to expand and diversify in 2012, we
expect this trend to continue.
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 Condensed
Consolidated Financial Statements have been prepared in accordance with U.S.
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
Note 2, Recent Accounting Pronouncements in this Form 10-Q and Note 2,
Significant Accounting Policies, in our Annual Report on Form 10-K for the year
ended December 31,
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2011, filed with the SEC. There were no material changes in the application of
our critical accounting estimates subsequent to that report.
Results of Operations
Net Income
The following table sets forth our selected Condensed Consolidated Statement of
Income data for each of the periods indicated:
For the Three Months Ended June For the Six Months Ended June
30, 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Gross premiums written $ 445.2 $ 462.4 $ 1,058.4 $ 933.2
Net premiums written $ 412.0 $ 437.0 $ 1,002.8 $ 886.5
Net premiums earned $ 437.1 $ 367.8 $ 875.6 $ 714.3
Other insurance revenue 2.3 2.2 7.0 6.8
Net loss and loss adjustment expenses (300.4 ) (250.6 ) (588.3 ) (471.7 )
Commission and other acquisition expenses (114.7 ) (105.8 ) (247.0 ) (212.9 )
General and administrative expenses (12.9 ) (9.4 ) (23.8 ) (18.6 )
Total underwriting income 11.4 4.2 23.5 17.9
Other general and administrative expenses (2.3 ) (3.4 ) (5.2 ) (6.5 )
Net investment income 20.1 19.8 38.5 39.0
Net realized and unrealized (losses) gains
on investment (2.9 ) 0.6 (1.5 ) 0.6
Junior subordinated debt repurchase
expense - (15.1 ) - (15.1 )
Accelerated amortization of junior
subordinated debt discount and issuance
cost - (20.3 ) - (20.3 )
Amortization of intangible assets (1.1 ) (1.3 ) (2.2 ) (2.5 )
Foreign exchange (losses) gains (0.9 ) 0.9 0.1 2.0
Interest and amortization expenses (9.6 ) (9.3 ) (17.2 ) (18.4 )
Income tax expense (0.1 ) (0.5 ) (1.0 ) (1.7 )
Income attributable to noncontrolling
interest (0.1 ) - (0.1 ) -
Net income (loss) attributable to Maiden
shareholders $ 14.5 $ (24.4 ) $ 34.9 $ (5.0 )
Ratios
Net loss and loss expense ratio 68.4 % 67.7 % 66.7 % 65.4 %
Acquisition cost ratio 26.1 % 28.6 % 28.0 % 29.5 %
General and administrative expense ratio 3.4 % 3.5 % 3.2 % 3.5 %
Expense ratio 29.5 % 32.1 % 31.2 % 33.0 %
Combined ratio 97.9 % 99.8 % 97.9 % 98.4 %
Net income attributable to Maiden shareholders for the three and six months
ended June 30, 2012 was $14.5 million and $34.9 million compared to a net loss
of $24.4 million and $5.0 million for the same periods in 2011, respectively.
The loss in both periods in 2011 was the result of charges related to the 2011
Senior Notes offering which includes $15.1 million of junior subordinated debt
repurchases expense and $20.3 million of accelerated amortization of
subordinated debt discount and issuance costs.
Excluding these items, net income was modestly higher in both periods reported
in 2012 compared to 2011 primarily as a result of improved underwriting, which
were partially offset by realized losses on investments from trading activities.
The 2011 underwriting results include $9.5 million in losses related to
thunderstorm and tornado activity across the U.S. in the second quarter of 2011,
net of the Company's quarterly provisions for normalized catastrophe activity.
44--------------------------------------------------------------------------------
Comparison of Three and Six Months Ended June 30, 2012 and 2011
Net Premiums Written - Net premiums written decreased by $25.0 million or 5.7%
and increased by $116.3 million or 13.1% for the three and six months ended
June 30, 2012, respectively, compared to the same periods in 2011. The following
table details the mix of our business on a net premiums written basis:
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in
Millions) ($ in Millions)
($ in Millions)
Diversified Reinsurance $ 144.0 34.9 % $ 158.0 36.2 % $ (14.0 ) (8.9 )%
AmTrust Quota Share
Reinsurance 195.6 47.5 % 216.5 49.5 % (20.9 ) (9.6 )%
ACAC Quota Share 72.4 17.6 % 62.5 14.3 % 9.9 15.8 %
Total $ 412.0 100.0 % $ 437.0 100.0 % $ (25.0 ) (5.7 )%
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Diversified Reinsurance $ 432.3 43.1 % $ 416.8 47.0 % $ 15.5 3.7 %
AmTrust Quota Share
Reinsurance 421.6 42.1 % 343.2 38.7 % 78.4 22.9 %
ACAC Quota Share 148.9 14.8 % 126.5 14.3 % 22.4 17.7 %
Total $ 1,002.8 100.0 % $ 886.5 100.0 % $ 116.3 13.1 %
The changes in net premiums written were primarily the result of the following:
• Continued underwriting discipline by Maiden US - Maiden US continues to
maintain its underwriting discipline in the face of ongoing significant
market competition and Maiden US wrote fewer new accounts during the
second quarter 2012 although it did continue to increase its participation
on certain existing accounts. As a result, there was a smaller increase in
premiums written for the three months ended June 30, 2012 of $0.2 million
or 0.2% compared to the same period in 2011. This compares with faster
growth of $38.8 million, or 11.8% for the six months ended June 30, 2012,
compared to the same period in 2011. In both the three and six months
ended June 30, 2012, the increased writings by Maiden US were offset by
reduced writings by Maiden Bermuda and the Company's international
operations, as certain accounts were reduced in size or were non-renewed.
• Growth on recurring business in the AmTrust Quota Share Reinsurance
segment - The results for both periods in 2011 include the $45.9 million
in force and unearned premium assumed at the commencement of the European
Hospital Liability Quota Share on April 1, 2011. Excluding that
non-recurring item, net premiums written increased by $25.0 million or
14.7% and $124.4 million or 41.9% for the three and six months ended
June 30, 2012 compared to the same periods in 2011, respectively. This
increase reflects AmTrust's continuing expansion through acquisition and
ongoing organic growth, both of which are benefiting from improved rate
levels.
• Growth in the ACAC Quota Share segment - For the three and six months
ended June 30, 2012, net premiums written increased by $9.9 million and
$22.4 million, or 15.8% and 17.7%, respectively, compared to the same
periods in 2011.
Net Premiums Earned - Net premiums earned increased by $69.3 million and $161.3
million or 18.9% and 22.6% for the three and six months ended June 30, 2012,
respectively, compared to the same periods in 2011. The following table details
the mix of our business on a net premiums earned basis:
45
--------------------------------------------------------------------------------
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Diversified Reinsurance $ 199.1 45.6 % $ 170.3 46.3 % $ 28.8 16.9 %
AmTrust Quota Share
Reinsurance 167.8 38.3 % 136.3 37.1 % 31.5 23.1 %
ACAC Quota Share 70.2 16.1 % 61.2 16.6 % 9.0 14.7 %
Total $ 437.1 100.0 % $ 367.8 100.0 % $ 69.3 18.9 %
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Diversified Reinsurance $ 403.6 46.1 % $ 344.5 48.2 % $ 59.1 17.1 %
AmTrust Quota Share
Reinsurance 335.7 38.3 % 250.8 35.1 % 84.9 33.9 %
ACAC Quota Share 136.3 15.6 % 119.0 16.7 % 17.3 14.5 %
Total $ 875.6 100.0 % $ 714.3 100.0 % $ 161.3 22.6 %
The increase in net premiums earned was primarily the result of:
• Growth in Maiden US business - Continued underwriting discipline and
strong organic premium written growth in 2011 and 2012 resulted in
increased earned premiums by Maiden US of $35.0 million or 25.0% and $66.8
million or 24.3% during the three and six months ended June 30, 2012,
respectively compared to the same periods in 2011. This growth in Maiden
US was partially offset in both periods by reduced writings by Maiden
Bermuda and the Company's international operations, as certain accounts
reduced in size or were non-renewed.
• Growth in the AmTrust Quota Share Reinsurance segment - The commencement
of the European Hospital Liability Quota Share on April 1, 2011 increased
premiums earned by $5.3 million and $29.2 million for the three and six
months ended June 30, 2012, respectively, while the business assumed under
the Master Agreement increased $26.2 million or 22.4% and $55.7 million or
24.1% for the three and six months ended June 30, 2012, respectively,
compared to the same periods in 2011.
• Growth in the ACAC Quota Share segment - For the three and six months
ended June 30, 2012 net premiums earned increased by $9.0 million or 14.7%
and $17.3 million or 14.5%, respectively, compared to the same periods in
2011.
Other Insurance Revenue - Other insurance revenue represents the IIS Fee
Business that is not directly associated with premium revenue assumed by the
Company and consists primarily of commissions in German auto business products
and increased 4.4% and 2.8% for the three and six months ended June 30, 2012,
respectively, compared to the same periods in 2011.
Net Investment Income - Net investment income increased by $0.3 million and
decreased by $0.5 million, or 1.3% and 1.1%, for the three and six months ended
June 30, 2012 compared to the same periods in 2011, respectively. The following
table details the Company's average invested assets and average book yield for
the three and six months ended June 30, 2012 and 2011:
For the Three Months Ended For the Six Months Ended June
June 30, 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Average invested assets $ 2,664.8 $ 2,238.3 $ 2,590.5 $ 2,209.6
Average book yield* 3.0 % 3.5 % 3.0 % 3.5 %
*Ratio of net investment income over average invested assets, at fair value,
including cash and cash equivalents and loan to related party.
Continued growth in the overall book of business in all segments as described
herein, combined with strongly positive cash flow from operations during both
the three and six month periods in 2012 contributed to the 19.1% and 17.2%
growth in invested assets in those periods, respectively. Despite the Company
reducing the amount of cash held during the second quarter and investing
46
--------------------------------------------------------------------------------in longer term assets, the continuing decline in interest rates to historically
low levels continue to reduce the Company's overall portfolio yield.
As a result, despite the increase in invested assets, the low interest rate
environment has continued to limit the growth of investment income in both the
three and six months ended June 30, 2012 as compared to the same periods in
2011. This has been further offset by increases in prepayments of the Company's
Agency mortgage-backed securities portfolio, resulting in increased levels of
amortization of bond premiums, which has reduced investment income in both
periods in 2012 as compared to the same periods in 2011. Finally, investment
income in the three and six months ended June 30, 2012 were reduced by interest
expense on a short trading position in a U.S. treasury bond which totaled $0.4
million and $0.8 million for those periods, respectively. The short position
which resulted in those costs was closed on June 28, 2012, after having been
opened on July 12, 2011.
Net Realized and Unrealized Investment Gains - Net realized and unrealized
losses on investments were $2.9 million and $1.5 million for the three and six
months ended June 30, 2012, respectively, compared to net realized and
unrealized gains of $0.6 million and $0.6 million for the three and six months
ended June 30, 2011, respectively. Please refer to Investments on page 56 for
further information.
Net Loss and Loss Adjustment Expenses - Net loss and loss adjustment expenses
increased by $49.8 million and $116.6 million, or 19.9% and 24.7% for the three
and six months ended June 30, 2012, respectively, compared to the same periods
in 2011. The Company's loss ratio for the three and six months ended June 30,
2012 increased to 68.4% and 66.7% from 67.7% and 65.4%, respectively, for the
same periods in 2011. The increased loss ratios were primarily the result of
lower amortization of deferred gains in 2012 compared to 2011. The Company
amortized gains as a reduction of losses assumed from the IIS and GMAC Re
Acquisitions were $5.7 million and $7.3 million for the three and six months
ended June 30, 2012, compared to $7.4 million and $15.0 million for the same
periods in 2011, respectively. The 2011 results and loss ratio include $9.5
million in losses related to thunderstorm and tornado activity across the U.S.
in the second quarter of 2011, net of the Company's quarterly provisions for
normalized catastrophe activity. These losses increased the 2011 loss ratios by
5.5% and 2.7% for the three and six months ended June 30, 2011, respectively.
Commission and Other Acquisition Expenses - Commission and other acquisition
expenses increased by $8.9 million and $34.1 million, or 8.4% and 16.0% for the
three and six months ended June 30, 2012, respectively, compared to the same
periods in 2011. The acquisition cost ratio decreased to 26.1% and 28.0% for the
three and six months ended June 30, 2012 compared to 28.6% and 29.5% for the
same periods in 2011, respectively. This reflects both the growth in earned
premium and modifications to ceding commission made under the Master Agreement
offset by the lower ceding commission and profit share under the European
Hospital Liability Quota Share, effective April 1, 2011 and discussed in further
detail in that segment's results of operations. This decrease is partially
offset by Maiden US continuing to experience an increase in business written on
a pro rata basis. In addition, as a result of the adoption of new accounting
standards regarding the recognition of deferred acquisition costs in the first
quarter of 2012, acquisition expenses increased an additional $0.8 million and
$2.0 million during the three and six months ended June 30, 2012, over the same
periods in 2011.
General and Administrative Expenses - General and administrative expenses
include expenses which are segregated for analytical purposes as a component of
underwriting income. General and administrative expenses consist of:
For the Three Months Ended For the Six Months Ended June
June 30, 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
General & administrative
expenses - segments $ 12.9 $ 9.4 $ 23.8 $ 18.6
General & administrative
expenses - corporate 2.3 3.4 5.2 6.5
Total general & administrative
expenses $ 15.2 $ 12.8 $ 29.0 $ 25.1
Total general and administrative expenses increased by $2.4 million and $3.9
million, or 18.5% and 15.5% for the three and six months ended June 30, 2012,
respectively, compared to the same periods in 2011. The general and
administrative expense ratio, which is a measure of the Company's efficiency,
were 3.4% and 3.2% for the three and six months ended June 30, 2012 compared to
3.5% for both periods in 2011, respectively. The decrease in the three and six
month periods reflects the continuing growth of larger quota share accounts
which enable the Company to operate more efficiently.
Interest and Amortization Expenses - The interest expense for the three and six
months ended June 30, 2012 and 2011 consists of the following:
For the Three Months Ended June For the Six Months Ended June
30, 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Junior Subordinated Debt $ 5.4 $ 9.1 $ 10.7 $ 18.2
Senior Notes 4.2 0.2 6.5 0.2
Total $ 9.6 $ 9.3 $ 17.2 $ 18.4
47--------------------------------------------------------------------------------
The increase in interest expense for the three months ended June 30, 2012
compared to the same period in 2011 was due to the issuance of the 2012 Senior
Notes during the first quarter 2012. The decrease in interest expense for the
six months ended June 30, 2012 was due to the repurchase on July 15, 2011 of
$107.5 million of the Junior Subordinated Debt , the repurchase of which was
financed with the issuance of the 2011 Senior Notes. These savings were
partially offset by the additional interest incurred on the 2012 Senior Notes.
The weighted average interest rate were 11.47% and 12.04% for the three and six
months ended June 30, 2012 compared to 16.72% and 16.83% for the same periods in
2011, respectively.
Income Taxes - The Company incurred $0.1 million and $1.0 million in income
taxes for the three and six months ended June 30, 2012 compared to $0.5 million
and $1.7 million in the same periods in 2011, respectively, primarily relating
to current income taxes in certain foreign jurisdictions.
Underwriting Results by Segment
The results of operations for our three business segments, Diversified
Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share are discussed
below.
Diversified Reinsurance Segment
The combined ratio was 98.6% and 98.8% for the three and six months ended
June 30, 2012 compared to 100.3% and 97.5% for the same periods in 2011,
respectively. In addition, the 2011 results included the underwriting impact of
U.S. storm activity which increased the combined ratio by 5.5% and 2.7% for the
three and six months ended June 30, 2011, respectively. In addition, in 2012,
the implementation of the new accounting standard for deferred acquisition costs
increased the combined ratio for the segment by 0.4% and 0.5% for the three and
six months ended June 30, 2012, respectively.
Excluding these items, the combined ratio was 98.2% and 98.3% for the three and
six months ended June 30, 2012 compared to 94.8% and 94.8% for the same periods
in 2011, respectively. The higher combined ratios for both periods in 2012 was
primarily the result of lower amortization of deferred gains from the IIS
Acquisition and the GMAC Acquisition. In addition the higher combined ratio in
2012, as adjusted, was due primarily to higher losses from business written by
Maiden Bermuda and a decline in international underwriting results primarily in
that business's German auto line.
The following table summarizes the underwriting results and associated ratios
for the Diversified Reinsurance segment:
For the Three Months Ended June
30, For the Six Months Ended June 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)Net premiums written $ 144.0 $ 158.0 $ 432.3 $ 416.8
Net premiums earned $ 199.1 $ 170.3 $ 403.6 $ 344.5
Other insurance revenue 2.3 2.2 7.0 6.8
Net loss and loss adjustment expenses (138.4 ) (116.4 ) (270.8 ) (226.7 )
Commission and other acquisition expenses (47.9 ) (48.3 ) (112.1 ) (99.7 )
General and administrative expenses (12.2 ) (8.3 ) (22.6 ) (16.3 )
Underwriting income (loss) $ 2.9 $ (0.5 ) $ 5.1 $ 8.6
Ratios
Net loss and loss expense ratio 68.7 % 67.5 % 66.0 % 64.5 %
Acquisition cost ratio 23.8 % 28.0 % 27.3 % 28.4 %
General and administrative expense ratio 6.1 % 4.8 % 5.5 % 4.6 %
Expense ratio 29.9 % 32.8 % 32.8 % 33.0 %
Combined ratio 98.6 % 100.3 % 98.8 % 97.5 %
Net Premiums Written - Net premiums written decreased by $14.0 million or 8.9%
and increased by $15.5 million or 3.7% for the three and six months ended
June 30, 2012, respectively, compared to the same periods in 2011,
respectively. The table below details net premiums written by line of business
in this segment for the three and six months ended June 30, 2012 and 2011:
48
--------------------------------------------------------------------------------
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Property $ 35.9 24.8 % $ 49.4 31.3 % $ (13.5 ) (27.5 )%
Casualty 82.8 57.5 % 76.8 48.6 % 6.0 7.8 %
Accident and Health 5.8 4.1 % 5.8 3.7 % - 0.1 %
International 19.5 13.6 % 26.0 16.4 % (6.5 ) (24.8 )%
Total Diversified Reinsurance $ 144.0 100.0 % $ 158.0 100.0 % $ (14.0 ) (8.9 )%
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Property $ 116.0 26.8 % $ 121.7 29.2 % $ (5.7 ) (4.7 )%
Casualty 234.7 54.3 % 207.8 49.9 % 26.9 12.9 %
Accident and Health 25.3 5.9 % 23.5 5.6 % 1.8 7.5 %
International 56.3 13.0 % 63.8 15.3 % (7.5 ) (11.7 )%
Total Diversified Reinsurance $ 432.3 100.0 % $ 416.8 100.0 % $ 15.5 3.7 %
Maiden US was successful in writing a series of new accounts in the second half
of 2011 which contributed to portions of its growth during the first six months
of 2012. Fewer new accounts were written during the first half of 2012 as Maiden
continues to maintain its underwriting discipline in the face of ongoing
competitive market conditions. This resulted in an increase in premiums written
of $0.2 million and $38.8 million, or 0.2% and 11.8% for the three and six
months ended June 30, 2012, respectively, compared to the same periods in 2011.
In both the three and six months ended June 30, 2012, the increased writings by
Maiden US were offset by reduced writings by Maiden Bermuda and the Company's
international operations, as certain accounts were reduced in size or
non-renewed.
Net Premiums Earned - Net premiums earned increased by $28.8 million or 16.9%
and $59.1 million or 17.1% for the three and six months ended June 30, 2012
compared to the same periods in 2011, respectively. The table below details net
premiums earned by line of business in this segment for the three and six months
ended June 30, 2012 and 2011:
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Property $ 55.9 28.1 % $ 43.9 25.8 % $ 12.0 27.2 %
Casualty 111.0 55.7 % 92.3 54.2 % 18.7 20.3 %
Accident and Health 10.7 5.4 % 11.5 6.7 % (0.8 ) (6.3 )%
International 21.5 10.8 % 22.6 13.3 % (1.1 ) (5.1 )%
Total Diversified Reinsurance $ 199.1 100.0 % $ 170.3 100.0 % $ 28.8 16.9 %
49--------------------------------------------------------------------------------
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Property $ 114.0 28.2 % $ 89.4 25.9 % $ 24.6 27.6 %
Casualty 215.0 53.3 % 177.9 51.7 % 37.1 20.8 %
Accident and Health 21.4 5.3 % 23.1 6.7 % (1.7 ) (7.5 )%
International 53.2 13.2 % 54.1 15.7 % (0.9 ) (1.6 )%
Total Diversified Reinsurance $ 403.6 100.0 % $ 344.5 100.0 % $ 59.1 17.1 %
The increase in earned premiums in both the three and six month periods ended
June 30, 2012 reflect trends in premium writings experienced in this segment in
the second half of 2011 and the first half of 2012, as previously described.
Other Insurance Revenue - Other insurance revenue represents the IIS Fee
Business, which consists primarily of commissions on German auto business
produced, that is not directly associated with premium revenue assumed by the
Company and increased 4.4% and 2.8% for the three and six months ended June 30,
2012, respectively, compared to the same periods in 2011.
Loss and Loss Adjustment Expenses - Net losses and loss expenses increased by
$22.0 million and $44.1 million or 18.9% and 19.4% for the three and six months
ended June 30, 2012, respectively, compared to the same periods in 2011. Loss
ratios were 68.7% and 67.5% for the three months ended June 30, 2012 and 2011,
respectively, and 66.0% and 64.5% for the six months ended June 30, 2012 and
2011, respectively. The higher loss ratio was primarily the result of lower
amortization of deferred gains in 2012 compared to 2011. The Company amortized
gains as a reduction of losses incurred of $5.7 million and $7.3 million and
$7.4 million and $15.0 million for the three and six months ended June 30, 2012
and 2011, respectively. The higher loss ratio in 2012, as adjusted, was due
primarily to higher losses from business written by Maiden Bermuda and a decline
in international underwriting results primarily in that business's German auto
line. In addition, the 2011 results included the underwriting impact of U.S.
storm activity which increased the loss ratio by 5.5% and 2.7% for the three and
six months ended June 30, 2011, respectively.
Commission and Other Acquisition Expenses - Commission and other acquisition
expenses decreased by $0.4 million or 0.6% and increased by $12.4 million or
12.5% for the three and six months ended June 30, 2012 compared to the same
period in 2011, respectively. The increase during the six months ended reflects
the growth of the segment in 2012 compared to 2011, consistent with the reasons
cited in the discussion of the change in earned premiums. In addition, as a
result of the adoption of new accounting standards regarding the recognition of
deferred acquisition costs in the first quarter 2012, acquisition expenses
increased an additional $0.8 million and $2.0 million during the three and six
months ended June 30, 2012, over the same periods in 2011. The implementation of
this new accounting standards increased the commission and other acquisition
expense ratio for the segment by 0.4% and 0.5% for the three and six months
ended June 30, 2012, respectively.
General and Administrative Expenses - General and administrative expenses
increased by $3.9 million and $6.3 million, or 46.2% and 38.3%, for the three
and six months ended June 30, 2012 compared to the three and six months ended
June 30, 2011, respectively. The general and administrative expense ratio was
6.1% and 5.5% for the three and six months ended June 30, 2012 compared to 4.8%
and 4.6% for the same periods in 2011, respectively.
AmTrust Quota Share Reinsurance Segment
For the three and six months ended June 30, 2012, the combined ratio were 96.5%
and 96.0%, compared to 97.9% and 97.7% for the same periods in 2011,
respectively. The improved results reflect stable loss ratios and lower
acquisition costs, the result of ongoing changes in the mix of business and
changes in underlying reinsurance agreements described below.
Effective April 1, 2011, the Company entered into a series of contract
modifications with AmTrust regarding the reinsurance coverage it provides under
the Quota Share Reinsurance Agreement ("Master Agreement"), including the ceding
commission arrangements contained within that contract. These changes include:
1) extension of the Master Agreement for one additional year, to July 1, 2014,
while continuing the automatic three-year renewal subject to the provisions of
the contract; 2) a reduction of the ceding commission payable under the
Reinsurance Agreement to 30.0% for the period April 1 to December 31, 2011; and
3) subsequent to December 31, 2011, a provision which potentially reduces the
ceding commission payable based on the mix of business ceded under the
Reinsurance Agreement, excluding business related to the Unitrin Business
Insurance ("UBI") business to either 30.5% or 30.0%.
In addition, on April 1, 2011, the Company entered into a separate one-year 40%
quota share agreement ("European Hospital Liability Quota Share") with AmTrust
Europe Limited and AmTrust International Underwriters Limited to cover those
entities medical liability business in Europe, substantially all of which is in
Italy. The Company's share of the maximum limit of liability is €2 million per
claim and it will pay a ceding commission of 5.0% plus a profit share as defined
in the agreement. The profit sharing is based upon the reinsured exceeding
defined underwriting performance of each contract year, commencing two years
after the beginning of each contract year. To the extent that the underwriting
performance is exceeded, the Company will share 50% of the excess amounts
computed. Pursuant to the terms of the European Hospital Liability Quota Share,
the Company assumed
50
--------------------------------------------------------------------------------
the in-force and unearned premium as of April 1, 2011 which totaled $45.9
million. The business written under this agreement is included in the Specialty
Risk and Extended Warranty line of business. Please refer to Item 5 - Other
Information, for additional information on recently enacted amendment to the
European Hospital Liability Quota Share.
For the Three Months Ended June
30, For the Six Months Ended June 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)
Net premiums written $ 195.6 $ 216.5 $ 421.6 $ 343.2
Net premiums earned $ 167.8 $ 136.3 $ 335.7 $ 250.8
Net loss and loss adjustment expenses (116.7 ) (94.7 ) (229.6 ) (168.3 )
Commission and other acquisition expenses (44.7 ) (38.1 ) (91.8 ) (75.3 )
General and administrative expenses (0.5 ) (0.6 ) (0.9 ) (1.3 )
Underwriting income $ 5.9 $ 2.9 $ 13.4 $ 5.9
Ratios
Net loss and loss expense ratio 69.6 % 69.5 % 68.4 % 67.1 %
Acquisition cost ratio 26.6 % 28.0 % 27.3 % 30.0 %
General and administrative expense ratio 0.3 % 0.4 % 0.3 % 0.6 %
Expense ratio 26.9 % 28.4 % 27.6 % 30.6 %
Combined ratio 96.5 % 97.9 % 96.0 % 97.7 %
Premiums - Net premiums written decreased by $20.9 million or 9.6% and increased
by $78.4 million or 22.9% for the three and six months ended June 30, 2012,
respectively, compared to the same periods in 2011. The table below details
components of net premiums written for the three and six months ended June 30,
2012 compared to the same periods in 2011:
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in
Millions) ($ in Millions)
($ in Millions)
Small Commercial
Business $ 81.9 41.8 % $ 54.9 25.4 % $ 27.0 49.0 %
Specialty Program 26.7 13.7 % 27.0 12.5 % (0.3 ) (0.8 )%
Specialty Risk and
Extended Warranty 87.0 44.5 % 134.6 62.1 % (47.6 ) (35.3 )%
Total AmTrust Quota
Share Reinsurance $ 195.6 100.0 % $ 216.5 100.0 % $ (20.9 ) (9.6 )%
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Small Commercial
Business $ 172.2 40.8 % $ 116.6 34.0 % $ 55.6 47.6 %
Specialty Program 48.9 11.6 % 35.5 10.3 % 13.4 38.1 %
Specialty Risk and
Extended Warranty 200.5 47.6 % 191.1 55.7 % 9.4 4.9 %
Total AmTrust Quota
Share Reinsurance $ 421.6 100.0 % $ 343.2 100.0 % $ 78.4 22.9 %
The results for both periods in 2011 include the $45.9 million in force and
unearned premium assumed at the commencement of the European Hospital Liability
Quota Share on April 1, 2011. Excluding that non-recurring item, net premiums
written increased
51
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by $25.0 million or 14.7% and $124.4 million or 41.9% for the three and six
months ended June 30, 2012 compared to the same periods in 2011, respectively.
This increase reflects AmTrust's continuing expansion through acquisition and
ongoing organic growth, both of which are benefiting from improved rate levels.
Net premiums earned increased by $31.5 million or 23.1% and $84.9 million or
33.9% for the three and six months ended June 30, 2012, respectively, compared
to the same periods in 2011 and reflect the ongoing growth of business under the
Master Agreement and the European Hospital Liability Quota Share. The table
below details components of net premiums earned for the three and six months
ended June 30, 2012 compared to the same periods in 2011:
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Small Commercial
Business $ 69.9 41.6 % $ 51.3 37.6 % $ 18.6 36.3 %
Specialty Program 22.9 13.7 % 20.1 14.8 % 2.8 14.1 %
Specialty Risk and
Extended Warranty 75.0 44.7 % 64.9 47.6 % 10.1 15.5 %
Total AmTrust Quota
Share Reinsurance $ 167.8 100.0 % $ 136.3 100.0 % $ 31.5 23.1 %
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Small Commercial
Business $ 136.8 40.7 % $ 100.5 40.1 % $ 36.3 36.1 %
Specialty Program 50.6 15.1 % 36.5 14.5 % 14.1 38.5 %
Specialty Risk and
Extended Warranty 148.3 44.2 % 113.8 45.4 % 34.5 30.4 %
Total AmTrust Quota
Share Reinsurance $ 335.7 100.0 % $ 250.8 100.0 % $ 84.9 33.9 %
Loss and Loss Adjustment Expenses - Net losses and loss expenses increased by
$22.0 million and $61.3 million or 23.2% and 36.4% for the three and six months
ended June 30, 2012, respectively, compared to the same periods in 2011. Loss
ratios were 69.6% and 68.4% for the three and six months ended June 30, 2012
compared to 69.5% and 67.1% in the same periods in 2011, respectively. The
increase in the loss ratios reflects the ongoing shift in the mix of business to
Specialty Risk and Extended Warranty, specifically the business written under
the European Hospital Liability Quota Share. In addition, the business written
under the Master Agreement produced a higher loss ratio in 2012 than in 2011.
Commission and Other Acquisition Expenses - Commission and other acquisition
expenses increased by $6.6 million and $16.5 million, or 17.0% and 21.8% for the
three and six months ended June 30, 2012 compared to the same periods in 2011,
respectively. Expenses have increased in both periods in 2012 as a result of
ongoing growth in earned premium under both the Master Agreement and the
European Hospital Liability Quota Share. The acquisition cost ratio decreased to
26.6% and 27.3% for the three and six months ended June 30, 2012 from 28.0% and
30.0% during the three and six months ended June 30, 2011, respectively, and
reflects the modifications to ceding commission made under the Master Agreement
and the lower ceding commission under the European Hospital Liability Quota
Share, both effective April 1, 2011. The impact of the lower ceding commission
rate reduced the amount of ceding commission paid to AmTrust by $3.2 million and
$4.5 million for the three and six months ended June 30, 2012, respectively,
compared to $1.1 million in the same periods in 2011, respectively.
General and Administrative Expenses - General and administrative expenses
decreased by approximately $0.1 million and $0.4 million for the three and six
months ended June 30, 2012, compared to the same periods in 2011, respectively.
52
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For the three and six months ended June 30, 2012, the combined ratio were 96.3%
and 96.4%, compared to 97.1% and 97.2% for the three and six months ended
June 30, 2011, respectively.
For the Three Months Ended June 30, For the Six Months Ended June 30,
2012 2011 2012 2011
($ in Millions) ($ in Millions)Net premiums written $ 72.4 $ 62.5 $ 148.9 $ 126.5
Net premiums earned $ 70.2 $ 61.2 $ 136.3 $ 119.0
Net loss and loss adjustment
expenses (45.3 ) (39.5 ) (87.9 ) (76.7 )
Commission and other acquisition
expenses (22.1 ) (19.4 ) (43.1 ) (37.9 )
General and administrative expenses (0.2 ) (0.5 ) (0.3 ) (1.0 )
Underwriting income $ 2.6 $ 1.8 $ 5.0 $ 3.4
Ratios
Net loss and loss expense ratio 64.5 % 64.5 % 64.5 % 64.5 %
Acquisition cost ratio 31.5 % 31.8 % 31.6 % 31.8 %
General and administrative expense
ratio 0.3 % 0.8 % 0.3 % 0.9 %
Expense ratio 31.8 % 32.6 % 31.9 % 32.7 %
Combined ratio 96.3 % 97.1 % 96.4 % 97.2 %
Premiums - Net premiums written increased by $9.9 million or 15.8% and $22.4
million or 17.7% for the three and six months ended June 30, 2012, respectively,
compared to the same periods in 2011. The increase in net premiums written was
primarily due to the ongoing expansion of ACAC's business. The table below
details components by line of business of net premiums written for the three and
six months ended June 30, 2012 and 2011:
For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Automobile liability $ 35.4 48.9 % $ 35.5 56.7 % $ (0.1 ) (0.2 )%
Automobile physical damage 37.0 51.1 % 27.0 43.3 % 10.0 36.7 %
Total ACAC Quota Share $ 72.4 100.0 % $ 62.5 100.0 % $ 9.9 15.8 %
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Written Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Automobile liability $ 79.3 53.2 % $ 72.2 57.1 % $ 7.1 9.8 %
Automobile physical damage 69.6 46.8 % 54.3 42.9 % 15.3 28.3 %
Total ACAC Quota Share $ 148.9 100.0 % $ 126.5 100.0 % $ 22.4 17.7 %
Net premiums earned increased by $9.0 million or 14.7% and $17.3 million or
14.5% for the three and six months ended June 30, 2012, respectively, compared
to the same periods in 2011. The table below details components by line of
business of net premiums earned for the three and six months ended June 30, 2012
and 2011:
53
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For the Three Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in
Millions) ($ in Millions) ($ in Millions)
Automobile liability $ 36.7 52.2 % $ 35.0 57.1 % $ 1.7 4.8 %
Automobile physical damage 33.5 47.8 % 26.2 42.9 % 7.3 27.8 %
Total ACAC Quota Share $ 70.2 100.0 % $ 61.2 100.0 % $ 9.0 14.7 %
For the Six Months Ended June 30,
2012 2011 Change in
% of % of
Net Premiums Earned Total Total Total Total $ %
($ in Millions) ($ in Millions) ($ in Millions)
Automobile liability $ 74.8 54.9 % $ 68.0 57.1 % $ 6.8 10.0 %
Automobile physical damage 61.5 45.1 % 51.0 42.9 % 10.5 20.6 %
Total ACAC Quota Share $ 136.3 100.0 % $ 119.0 100.0 % $ 17.3 14.5 %
Loss and Loss Adjustment Expenses - Net losses and loss expenses increased by
$5.8 million and $11.2 million or 14.7% and 14.5% for the three and six months
ended June 30, 2012, respectively, compared to the same periods in 2011. Loss
ratios remained flat at 64.5% for both the three and six months ended June 30,
2012 and 2011.
Commission and Other Acquisition Expenses - The ACAC Quota Share provides that
the reinsurers pay a provisional ceding commission equal to 32.5% of ceded
earned premiums, net of premiums ceded by the personal lines companies for
inuring reinsurance, subject to adjustment. The ceding commission is subject to
adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is
60.5% or less and a minimum of 30.5% if the loss ratio is 64.5% or higher. For
the three and six months ended June 30, 2012 and 2011, the acquisition cost
ratio of 31.5% and 31.6% and 31.8% and 31.8%, respectively, reflects the
adjusted ceding commission recorded in addition to the U.S. federal excise tax
payable.
General and Administrative Expenses - General and administrative expenses
decreased by approximately $0.3 million and $0.7 million for the three and six
months ended June 30, 2012, compared to the same periods in 2011, respectively.
Liquidity and Capital Resources
Liquidity
Maiden Holdings is a holding company and transacts no business of its own. We
therefore rely on cash flows to Maiden Holdings in the form of dividends,
advances and loans and other permitted distributions from its subsidiary
companies to make dividend payments on its common shares.
The jurisdictions in which our operating subsidiaries are licensed to write
business impose regulations requiring companies to maintain or meet various
defined statutory ratios, including solvency and liquidity requirements. Some
jurisdictions also place restrictions on the declaration and payment of
dividends and other distributions.
The payment of dividends from Maiden Holdings'Bermuda-domiciled operating
subsidiary Maiden Bermuda is, under certain circumstances, limited under Bermuda
law, which requires our Bermuda operating subsidiary to maintain certain
measures of solvency and liquidity including the Bermuda Solvency Capital
Requirement. In addition, Maiden Bermuda is also subject to statutory and
regulatory restrictions under the Insurance Act 1978 (Bermuda) that limit the
maximum amount of annual dividends or distributions to be paid by Maiden Bermuda
to Maiden Holdings without notification to the Bermuda Monetary Authority of
such payment (and in certain cases prior approval of the Bermuda Monetary
Authority). Maiden Bermuda is also restricted to pay dividends that would result
in Maiden Bermuda failing to comply with the enhanced capital requirement
("ECR") as calculated based on the Bermuda Solvency Requirement ("BSCR"). At
June 30, 2012, the statutory capital and surplus of Maiden Bermuda was $857.7
million. During 2012 and 2011, Maiden Bermuda paid no dividends to Maiden
Holdings.
Maiden Holdings' U.S. domiciled operating subsidiaries, Maiden US and Maiden
Specialty, are subject to significant regulatory restrictions limiting their
ability to declare and pay dividends by their states of domicile, which are
Missouri and North Carolina, respectively. In addition, there are restrictions
based on risk-based capital tests which is the threshold that constitutes the
authorized control level. If Maiden US' or Maiden Specialty's statutory capital
and surplus falls below the authorized control level, their respective
domiciliary insurance regulators are authorized to take whatever regulatory
actions are considered necessary to protect policyholders and creditors. During
2012 and 2011, Maiden US and Maiden Specialty paid no dividends.
The inability of the subsidiaries of Maiden Holdings to pay dividends and other
permitted distributions could have a material
54
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adverse effect on Maiden Holdings' cash requirements and ability to make
principal, interest and dividend payments on its 2011 Senior Notes, 2012 Senior
Notes, Junior Subordinated Debt and common shares.
Our sources of funds primarily consist of premium receipts net of commissions,
investment income, net proceeds from capital raising activities, which may
include the issuance of common shares, and proceeds from sales, maturities and
calls of investments. Cash is used primarily to pay net loss and loss adjustment
expenses, interest on debt, general and administrative expenses and dividends,
with the remainder made available to our investment managers for investment in
accordance with our investment policy. A summary of cash flows provided by (used
in) operating, investing and financing activities for the six months ended
June 30, 2012 and 2011 is as follows:
For the Six Months Ended June 30,
2012 2011
($ in Millions)
Operating activities $ 166.4 $ 43.6
Investing activities (380.6 ) 39.0
Financing activities 85.2 18.5
Effect of exchange rate changes on
foreign currency cash (0.1 )
1.1
Total (decrease) increase in cash and
cash equivalents $ (129.1 ) $ 102.2
Cash flows provided by operations for the six months ended June 30, 2012 were
$166.4 million compared to $43.6 million for the same period in 2011. The
increase in the amount of cash provided by operations in the first half of 2012
reflects the significant growth in the Company during both 2011 and 2012, along
with stable combined ratios. The Company's assets grew by $357.6 million or
10.5% as of June 30, 2012 compared to December 31, 2011. The combination of
strong premium growth and stable combined ratios should continue to generate
positive cash flow from operations resulting in continued growth in the
Company's invested assets.
Investing cash flows consist primarily of proceeds from the sales and maturities
of investments and payments for investments acquired. Net cash from investing
activities used was $380.6 million during the six months ended June 30, 2012
compared to $39.0 million provided by investing activities for the same period
in 2011. Despite the current interest rate environment which continues to
provide historically low fixed income yield levels, the Company continues to
deploy available cash for longer-term investments as quickly as investment
conditions permit and to maintain, where possible, cash and cash equivalent
balances at low levels. Continuation of current market conditions however, may
result in the Company accumulating elevated levels of cash and cash equivalents
which may result in slower growth in investment income and in certain instances,
reductions in investment income despite the increase in invested assets.. During
the six months ended June 30, 2012, the purchases of fixed maturity securities
exceeded the proceeds of sales and calls of such instruments by $358.3 million.
Cash flows provided by financing activities were $85.2 million for the six
months ended June 30, 2012 compared to $18.5 million used in the same period in
2011. For the six months ended June 30, 2012, cash provided by financing
activities reflects the proceeds from the issuance of the 2012 Senior Notes of
$96.6 million offset by $11.6 million in dividends paid to common shareholders,
compared to $10.1 million of dividends paid in 2011, respectively. During the
first half of 2011, cash flow provided by financing activities reflected the
proceeds from the issuance of the 2011 Senior Notes, offset by the repayment of
$76.2 million in repurchase agreements.
Restrictions, Collateral and Specific Requirements
Maiden Bermuda is neither licensed nor admitted as an insurer, nor is it
accredited as a reinsurer, in any jurisdiction outside of Bermuda. As a result,
it is generally required to post collateral security with respect to any
reinsurance liabilities it assumes from ceding insurers domiciled in the United
States in order for U.S. ceding companies to obtain credit on their U.S.
statutory financial statements with respect to insurance liabilities ceded by
them. Additionally for certain non-U.S. reinsurance contracts the provision of
collateral for reinsurance liabilities is required. Under applicable statutory
or contractual provisions, the security arrangements may be in the form of
letters of credit, reinsurance trusts maintained by trustees or funds-withheld
arrangements where assets are held by the ceding company.
Maiden Bermuda primarily uses reinsurance trusts and letters of credit to meet
collateral requirements, consequently, cash equivalents and investments are
pledged in favor of ceding companies and issuing banks.
Maiden US also offers to its clients, on a voluntary basis, the ability to
collateralize certain liabilities related to the reinsurance contracts it
issues. Under these arrangements, Maiden US retains broad investment discretion
in order to achieve its business objectives whilst offering clients the
additional security a collateralized arrangement offers. We believe this offers
Maiden US a significant competitive advantage and improves Maiden US' retention
of high-quality clients. As a result of the transition of relationships
resulting from the GMAC Acquisition, as of June 30, 2012, certain of these
liabilities and collateralized arrangements are obligations of Maiden Bermuda
while the remainder are obligations of Maiden US.
As of June 30, 2012, total cash and cash equivalents and fixed maturity
investments used as collateral were $1,948.6 million
55
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compared to $1,586.2 million as of December 31, 2011. The increase was primarily
attributable to the increase in assets provided as collateral for the AmTrust
Quota Share Reinsurance segment.
The following table details additional information on those assets as of
June 30, 2012 and December 31, 2011:
June 30, 2012 December 31, 2011
Cash & Fixed Cash & Fixed
Equivalents Maturities Total Equivalents Maturities Total
($ in Millions) ($ in Millions)
Maiden US $ 18.3 $ 727.3 $ 745.6 $ 19.4 $ 624.4 $ 643.8
Maiden Bermuda 49.8 382.2 432.0 50.8 368.4 419.2
Diversified Reinsurance 68.1 1,109.5 1,177.6 70.2 992.8 1,063.0
Maiden Bermuda 16.0 679.2 695.2 41.7 419.5 461.2
AmTrust Quota Share
Reinsurance 16.0 679.2 695.2 41.7 419.5 461.2
Maiden Bermuda 0.3 75.5 75.8 3.0 59.0 62.0
ACAC Quota Share 0.3 75.5 75.8 3.0 59.0 62.0
Total $ 84.4 $ 1,864.2 $ 1,948.6 $ 114.9 $ 1,471.3 $ 1,586.2
As part of the Master Agreement, Maiden Bermuda has also loaned funds to AmTrust
totaling $168.0 million as of June 30, 2012 and December 31, 2011, respectively,
to AII to satisfy collateral requirements.
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 letters 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.
IIS Acquisition - Funds Withheld
The substantial majority of the premiums and losses underwritten by GMAC IICL
are subject to collateral requirements in the form of letters of credit and
trust agreements. At the closing of the IIS Acquisition, the Company settled
cash balances applicable to the subject reinsurance contracts with GMAC IICL of
$26.2 million. Actual assets in support of the liabilities assumed under the
IICL Agreement will be transferred to the Company when the subject individual
agreements are novated to Maiden Bermuda. In the interim, under the funds
withheld provisions of the IICL Agreement, the Company is fully credited for the
investment income earned by the underlying assets which support the letters of
credit and trust agreements GMAC IICL has provided to its ceding companies.
The existing funds withheld amounts ("IIS Funds Withheld") and cash transferred
to GMAC IICL are included in the consolidated balance sheet as Funds
Withheld. During 2011, the substantial majority of underlying reinsurance
contracts were novated to Maiden Bermuda per the terms of the IICL Agreement. As
at June 30, 2012, one contract had not yet been novated and this is expected to
occur in 2012. Maiden Bermuda now provides collateral in the form of both trusts
and letters of credit as required by the respective reinsurance contracts. As at
June 30, 2012 and December 31, 2011, the IIS Funds Withheld balance consisted of
the following:
June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
Fixed maturities, at fair value $ 25.7 109.7 % $ 27.3 112.2 %
Cash and cash equivalents 3.3 13.9 % 2.4 10.1 %
Funds held on underlying business 0.6 2.6 % 0.6 2.5 %
Insurance balances receivable and other (6.2 ) (26.2 )% (6.0 ) (24.8 )%
Total $ 23.4 100.0 % $ 24.3 100.0 %
56
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The fixed maturity portfolio consists primarily of non-U.S. government debt,
100.0% of which is rated AAA as of June 30, 2012 and December 31, 2011. All
corporate bonds held as of June 30, 2012 are investment grade securities. The
fixed maturities consisted of the following:
June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
United Kingdom government bonds $ 19.6 76.5 % $ 27.3 100.0 %
Corporate bonds 6.1 23.5 % - - %
Total $ 25.7 100.0 % $ 27.3 100.0 %
We do not have any non-U.S. government and government related obligations
related to Ireland, Italy, Greece, Portugal or Spain as at June 30, 2012 and
December 31, 2011. See the discussion in Counterparty Credit Risk in Item 3 of
Part I of this Form 10-Q related to the release of assets forming part of the
IIS Funds Withheld.
Investments
Our funds are primarily invested in liquid, high-grade fixed income securities
and are substantially considered AFS with an orientation to generating current
income. As of June 30, 2012, the weighted average duration of our fixed maturity
investment portfolio was 3.4 years and there were approximately $93.6 million of
net unrealized gains in the portfolio, compared to a duration of 2.8 years and
net unrealized gains of $63.6 million in the portfolio as of December 31,
2011. The duration on the Company's portfolio as of June 30, 2012 rose as a
result of increased purchases of longer-duration corporate bonds in the first
half of 2012, which were partially offset by faster prepayments on its U.S.
agency mortgage-backed bonds.
The Company's AFS fixed maturity investments increased by $372.3 million or
18.4% for the six months ended June 30, 2012 compared to December 31, 2011,
which was the result of the Company's continued strong premium growth and stable
combined ratios which continue to generate significant positive cash flow from
operations. The table below shows the aggregate amounts of our invested AFS
assets and other investments at fair value including the average yield and
duration at June 30, 2012 and December 31, 2011:
Original or Gross Gross
amortized unrealized unrealized Average
June 30, 2012 cost gains losses Fair value Average yield* duration
Available-for-sale
securities: ($ in Millions)
1.7
U.S. treasury bonds $ 42.7 $ 1.5 $ - $ 44.2 1.9 % years
U.S. agency 2.7
bonds - mortgage-backed 1,009.9 39.7 (0.5 ) 1,049.1 3.1 % years
0.1
U.S. agency bonds - other 16.7 1.6 - 18.3 3.6 % years
2.7
Non-U.S. government bonds 58.4 0.2 (0.8 ) 57.8 1.6 % years
4.1
Other mortgage-backed bonds 23.2 0.2 - 23.4 2.8 % years
4.6
Corporate bonds 1,029.1 69.7 (18.9 ) 1,079.9 4.9 % years
0.6
Municipal bonds 119.4 0.9 - 120.3 0.8 % years
Total available-for-sale 3.4
fixed maturities 2,299.4 113.8 (20.2 ) 2,393.0 3.7 % years
Other investments 2.4 0.4 (0.1 ) 2.7
Total investments $ 2,301.8 $ 114.2 $ (20.3 ) $ 2,395.7
57
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Original or Gross Gross
amortized unrealized unrealized Average
December 31, 2011 cost gains losses Fair value Average yield* duration
Available-for-sale
securities: ($ in Millions)
2.1
U.S. treasury bonds $ 44.2 $ 1.8 $ - $ 46.0 1.8 % years
U.S. agency 2.7
bonds - mortgage-backed 928.9 43.3 (0.1 ) 972.1 3.4 % years
1.6
U.S. agency bonds - other 10.4 0.6 - 11.0 2.6 % years
2.7
Non-U.S. government bonds 52.5 0.1 (0.3 ) 52.3 1.1 % years
1.6
Other mortgage-backed bonds 9.9 - - 9.9 2.7 % years
3.5
Corporate bonds 742.9 47.7 (30.2 ) 760.4 4.8 % years
0.5
Municipal bonds 168.3 0.7 - 169.0 0.7 % years
Total available-for-sale 2.8
fixed maturities 1,957.1 94.2 (30.6 ) 2,020.7 3.6 % years
Other investments 2.0 0.3 (0.1 ) 2.2
Total investments $ 1,959.1 $ 94.5 $ (30.7 ) $ 2,022.9
*Average yield is calculated by dividing annualized investment income for each
sub-component of available-for sale securities (including amortization of
premium or discount) by amortized cost and therefore does not include investment
income earned on cash and cash equivalents or other short-term investments.
We review our investment portfolio for impairment on a quarterly basis.
Impairments of investment securities results in a charge to operations when a
market decline below cost is deemed to be other-than-temporary. To determine the
recovery period of a fixed maturity security, we consider the facts and
circumstances surrounding the underlying issuer including, but not limited to,
the following:
• Historic and implied volatility of the security;
• Length of time and extent to which the fair value has been less than
amortized cost;
• Adverse conditions specifically related to the security or to specific
conditions in an industry or geographic area;
• Failure, if any, of the issuer of the security to make scheduled payments; and
• Recoveries or additional declines in fair value subsequent to the balance
sheet date.
When assessing our intent to sell a fixed maturity security or if it is more
likely that we will be required to sell a fixed maturity security before
recovery of its cost basis, we evaluate facts and circumstances such as, but not
limited to, decisions to reposition our security portfolio, sale of securities
to meet cash flow needs and sales of securities to capitalize on favorable
pricing. In order to determine the amount of the credit loss for a fixed
maturity security, we calculate the recovery value by performing a discounted
cash flow analysis based on the current cash flows and future cash flows we
expect to recover. The discount rate is the effective interest rate implicit in
the underlying fixed maturity security. The effective interest rate is the
original yield or the coupon if the fixed maturity security was previously
impaired. If other-than-temporary impairment ("OTTI") exists and we have the
intent to sell the security, we conclude that the entire OTTI is credit-related
and the amortized cost for the security is written down to current fair value
with a corresponding charge to realized loss on our Consolidated Statements of
Income. If we do not intend to sell a fixed maturity security or it is not more
likely than not we will be required to sell a fixed maturity security before
recovery of its amortized cost basis but the present value of the cash flows
expected to be collected is less than the amortized cost of the fixed maturity
security (referred to as the credit loss), we conclude that an OTTI has occurred
and the amortized cost is written down to the estimated recovery value with a
corresponding charge to realized loss on our Consolidated Statements of Income,
as this is also deemed the credit portion of the OTTI. The remainder of the
decline to fair value is recorded to other comprehensive income ("OCI"), as an
unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a
non-credit (i.e., recoverable) impairment.
During the three and six months ended June 30, 2012 and 2011, the Company
recognized no OTTI. Based on our qualitative and quantitative impairment review
of each asset class within our fixed maturity portfolio, the remaining
unrealized losses on fixed maturities at June 30, 2012, were primarily due to
widening of credit spreads relating to the market illiquidity, rather than
credit events. Because we do not intend to sell these securities and it is not
more likely than not that we will 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 June 30, 2012.
The Company may, from time to time, engage in investment activity that will be
considered trading activity, in amounts generally less than $100 million. This
trading activity is generally focused on taking long or short positions in
United States Treasury securities. These periodic activities are classified as
trading for the purpose of augmenting where possible investment returns.
Unrealized gains and losses from trading activities are recorded in net realized
and unrealized gains on investment on the Company's condensed consolidated
statements of income.
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For the three and six months ended June 30, 2012, the Company recorded realized
and unrealized losses from these trading activities of $2.9 million and $1.6
million, respectively, compared to gains of $0.5 million and $0.5 million, for
the same periods in 2011, respectively. As of June 30, 2012, the Company had no
open positions, long or short, that would be classified as trading activities.
The following table presents information regarding our available-for-sale
securities and other investments that were in an unrealized loss position at
June 30, 2012 and December 31, 2011, and split by the length of time the assets
are in a continuous unrealized loss position:
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
June 30, 2012 Value Losses Value Losses Value LossesAvailable-for-sale
securities: ($ in Millions)
U.S. agency
bonds - mortgage-backed $ 65.9 $ (0.5 ) $ - $ - $ 65.9 $ (0.5 )
Non-U.S. government bonds 47.7 (0.8 ) - $ - 47.7 (0.8 )
Corporate bonds 201.2 (5.7 ) 130.5 (13.2 ) 331.7 (18.9 )
Total available-for-sale
fixed maturities 314.8 (7.0 ) 130.5 (13.2 ) 445.3 (20.2 )
Other investments 1.7 (0.1 ) - - 1.7 (0.1 )
Total temporarily
impaired
available-for-sale
securities and other
investments $ 316.5 $ (7.1 ) $ 130.5 $ (13.2 ) $ 447.0 $ (20.3 )
As at June 30, 2012, there were approximately 64 securities in an unrealized
loss position with a fair value of $447.0 million and unrealized losses of $20.3
million. Of these securities, there are 9 securities that have been in an
unrealized loss position for 12 months or greater with a fair value of $130.5
million and unrealized losses of $13.2 million.
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2011 Value Losses Value Losses Value Losses
Available-for-sale
securities: ($ in Millions)
U.S. agency
bonds - mortgage-backed $ 30.4 $ (0.1 ) $ - $ - $ 30.4 $ (0.1 )
Non-U.S. government bonds 43.6 (0.3 ) - $ - 43.6 (0.3 )
Corporate bonds 227.4 (7.4 ) 125.1 (22.8 ) 352.5 (30.2 )
Total available-for-sale
fixed maturities 301.4 (7.8 ) 125.1 (22.8 ) 426.5 (30.6 )
Other investments 1.2 (0.1 ) - - 1.2 (0.1 )
Total temporarily
impaired
available-for-sale
securities and other
investments $ 302.6 $ (7.9 ) $ 125.1 $ (22.8 ) $ 427.7 $ (30.7 )
As at December 31, 2011, there were approximately 62 securities in an unrealized
loss position with a fair value of $427.7 million and unrealized losses of $30.7
million. Of these securities, there are 8 securities that have been in an
unrealized loss position for 12 months or greater with a fair value of $125.1
million and unrealized losses of $22.8 million.
The following table summarizes the fair value by contractual maturity of our
AFS fixed maturity investment portfolio as of June 30, 2012 and December 31,
2011:
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June 30, 2012 December 31, 2011
($ in % of % of
Millions) Total ($ in Millions) Total
Due in one year or less $ 43.4 1.8 % $ 54.3 2.7 %
Due after one year through
five years 359.8 15.0 % 299.9 14.8 %
Due after five years through
ten years 764.6 32.0 % 502.9 24.9 %
Due after ten years 152.7 6.4 % 181.6 9.0 %
1,320.5 55.2 % 1,038.7 51.4 %
U.S. agency
bonds - mortgage-backed 1,049.1 43.8 % 972.1 48.1 %
Other mortgage-backed bonds 23.4 1.0 % 9.9 0.5 %
Total $ 2,393.0 100.0 % $ 2,020.7 100.0 %
As of June 30, 2012 and December 31, 2011, 99.2% and 99.1%, respectively, of our
AFS fixed income portfolio consisted of investment grade securities. We define a
security as being below-investment grade if it has a Standard & Poor's ("S&P")
credit rating of BB+ or less. The following table summarizes the composition of
the fair value of our fixed maturity investments at the dates indicated by
ratings as assigned by S&P (and/or other rating agencies when S&P ratings were
not available):
Amortized Fair
June 30, 2012 Cost Value % of Total Fair Value
Ratings ($ in Millions)
U.S. treasury bonds $ 42.7 $ 44.2 1.8 %
U.S. agency bonds 1,026.6 1,067.4 44.6 %
AAA 173.0 174.8 7.3 %
AA+, AA, AA- 182.7 190.4 8.0 %
A+, A, A- 409.3 421.7 17.6 %
BBB+, BBB, BBB- 446.8 476.6 19.9 %
BB+ or lower 18.3 17.9 0.8 %
Total $ 2,299.4 $ 2,393.0 100.0 %
Amortized Fair
December 31, 2011 Cost Value % of Total Fair Value
Ratings ($ in Millions)
U.S. treasury bonds $ 44.2 $ 46.0 2.3 %
U.S. agency bonds 939.3 983.1 48.6 %
AAA 160.3 161.9 8.0 %
AA+, AA, AA- 151.0 153.3 7.6 %
A+, A, A- 327.8 328.4 16.3 %
BBB+, BBB, BBB- 316.1 330.2 16.3 %
BB+ or lower 18.4 17.8 0.9 %
Total $ 1,957.1 $ 2,020.7 100.0 %
Substantially all of the Company's U.S. government agency-based securities
holdings are mortgage-backed bonds. Additional details on the mortgage-backed
bonds component of our U.S. government agency-based investment portfolio at
June 30, 2012 and December 31, 2011 are provided below:
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June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in
Mortgage-backed bonds Millions) ($ in Millions)
Residential mortgage-backed
(RMBS)
GNMA - fixed rate $ 148.9 13.9 % $ 185.3 18.8 %
FNMA - fixed rate 538.5 50.5 % 487.3 49.6 %
FNMA - variable rate 54.2 5.1 % 77.8 7.9 %
FHLMC - fixed rate 291.6 27.3 % 221.7 22.6 %
FHLMC - variable rate 15.9 1.5 % - - %
Total RMBS 1,049.1 98.3 % 972.1 98.9 %
Total U.S. agency
mortgage-backed bonds 1,049.1 98.3 % 972.1 98.9 %
Non-MBS fixed rate agency bonds 18.3 1.7 % 11.0 1.1 %
Total U.S. agency bonds $ 1,067.4 100.0 % $ 983.1 100.0 %
The following table provides a summary of changes in fair value associated with
the Company's U.S. agency mortgage-backed bonds portfolio for the three and six
months ended June 30, 2012 and 2011:
For the Three Months Ended
June 30,
2012 2011
U.S. agency mortgage-backed bonds ($ in Millions)
Beginning balance $ 1,109.5 $ 972.7
Purchases 29.8 72.3
Sales and paydowns (88.1 ) (35.5 )
Net realized gains on sales - included in net income - -
Change in net unrealized losses - included in other
comprehensive income
0.3
14.4
Amortization of bond premium and discount (2.4 ) (0.8 )
Ending balance $ 1,049.1 $ 1,023.1
For the Six Months Ended June
30,
2012 2011
U.S. agency mortgage-backed bonds ($ in Millions)
Beginning balance $ 972.1 $ 969.5
Purchases 255.6 135.7
Sales and paydowns (171.3 ) (91.0 )
Net realized gains on sales - included in net income - 0.3
Change in net unrealized losses - included in other
comprehensive income
(3.7 )
10.5
Amortization of bond premium and discount (3.6 ) (1.9 )
Ending balance $ 1,049.1 $ 1,023.1
The Company continued to experience elevated levels of paydowns of its U.S.
agency mortgage-backed bond portfolio for the three and six months ended June
30, 2012, compared to the same periods in 2011. The increased paydowns reflect
the ongoing decline in interest rates in the U.S. and globally, resulting in
higher refinancing activity in the U.S. mortgage markets. These increased
paydowns have in turn increased the amount of premium amortization recognized by
the Company for those periods, reducing the amount of net investment income
reported by the Company as a result.
The Company has substantial holdings of corporate securities that take advantage
of various investment opportunities in this asset class. As of June 30, 2012 and
December 31, 2011, 21.3% and 33.0% of its corporate securities were floating
rate securities. Security holdings by sector and financial strength rating by
S&P in this asset class as of June 30, 2012 and December 31, 2011 are as
follows:
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Ratings*
June 30, 2012 AAA AA A BBB BB+ or lower % of Total Fair Value
($ in
Millions)
Corporate bonds
Financial Institutions 8.2 % 7.0 % 34.9 % 16.7 % 0.6 % 67.4 % $ 728.6
Industrials - % 1.5 % 2.6 % 25.7 % - % 29.8 % 320.9
Utilities/Other - % - % - % 1.7 % 1.1 % 2.8 % 30.4
Total corporate bonds 8.2 % 8.5 % 37.5 % 44.1 %
1.7 % 100.0 % $ 1,079.9
Ratings*
December 31, 2011 AAA AA A BBB BB+ or lower % of Total Fair Value
($ in Millions)
Corporate bonds
Financial Institutions 7.5 % 2.6 % 36.8 % 22.1 % 0.8 % 69.8 % $ 531.1
Industrials - % 3.1 % 4.3 % 19.0 % - % 26.4 % 199.9
Utilities/Other - % - % - % 2.3 % 1.5 % 3.8 % 29.4Total corporate bonds 7.5 % 5.7 % 41.1 % 43.4 %
2.3 % 100.0 % $ 760.4
*Ratings as assigned by S&P
In the three and six months ended June 30, 2012, the Company increased its
allocation to investment grade corporate bonds, in particular bonds not in the
Financial Institutions sector. These purchases have marginally increased the
duration of the Company's AFS fixed maturity portfolio as of June 30, 2012. The
Company's 10 largest corporate holdings as of June 30, 2012 as carried at fair
value and as a percentage of all fixed income securities are as follows:
% of Holdings
Based on Fair
Value of All
Fixed Income
June 30, 2012 Fair Value Securities Rating*
($ in Millions)
Morgan Stanley FLT, Due 10/18/2016 $ 34.9 1.5 %
A-
Citigroup FLT, Due 6/9/2016 23.4 1.0 %
BBB+
Northern Rock Asset Mgt., 3.875% Due
11/16/2020 22.1 0.9 %
AAA
Rabobank Nederland UTREC, 3.875% Due
2/8/2022 20.3 0.8 %
AA
SLM Corp FLT, Due 1/27/2014 19.1 0.8 %
BBB-
Bear Stearns FLT, Due 11/21/2016 19.1 0.8 %
A
Barclays Bank PLC NY FLT, Due
2/24/2020 18.7 0.8 %
A+
JPMorgan Chase & Co FLT, Due 6/13/2016 18.6 0.8 %
A
HSBC Financial FLT, Due 6/1/2016 18.3 0.7 %
A
PartnerRe Finance LLC, 5.5% Due
6/1/2020 15.8 0.7 % A-
Total $ 210.3 8.8 %
* Ratings as assigned by S&P
(1) Securities with the notation FLT are floating rate securities.
The Company holds no asset-backed securities.
Given the Company's status as a Bermuda domicile with limited U.S. federal tax
exposure, to the extent that the Company invests in fixed maturity securities
issued by U.S. state and local governments, these investments are made on the
merits of the underlying investment and not on the tax-exempt status of those
securities under U.S. federal tax law. As a result, as at June 30, 2012 and
December 31, 2011, municipal securities only composed 5.0% and 8.4% of the
Company's fixed maturity portfolio, respectively.
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As at June 30, 2012 and December 31, 2011, we own the following securities not
denominated in U.S. dollars:
June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
Corporate bonds $ 131.3 69.4 % $ 65.7 55.7 %
Non-U.S. government bonds 57.8 30.6 % 52.3 44.3 %
Total $ 189.1 100.0 % $ 118.0 100.0 %
The increase in these assets held during 2012 is primarily the result of funds
relating to the European Hospital Liability Quota Share, which incepted on April
1, 2011 and under which the Company provides collateral which is denominated in
Euro. These securities were invested in the following currencies:
June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
Euro $ 171.3 90.6 % $ 107.2 90.8 %
Swedish krona 9.6 5.1 % 9.9 8.4 %
Australian dollar 7.3 3.8 % - - %
British pound 0.9 0.5 % 0.9 0.8 %
Total $ 189.1 100.0 % $ 118.0 100.0 %
We do not have any government related obligations of Ireland, Italy, Greece,
Portugal and Spain as at June 30, 2012 and December 31, 2011. As at June 30,
2012 and December 31, 2011, 90.9% and 90.4% of the Company's non-U.S. government
issuers were rated AA or higher by S&P. The three largest non-U.S. government
issuers held by the Company as at June 30, 2012 and December 31, 2011 are:
June 30, 2012
December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
Germany $ 27.5 47.6 % $ 28.6 54.6 %
Sweden 8.5 14.8 % 8.8 16.8 %
Netherlands 5.8 10.0 % 6.4 12.2 %
All other 16.0 27.6 % 8.5 16.4 %
Total Non-U.S. government bonds $ 57.8 100.0 % $ 52.3 100.0 %
For corporate bonds denominated in Euros, the following table summarizes the
composition of the fair value of our fixed maturity investments at the dates
indicated by ratings as assigned by S&P and/or other rating agencies when S&P
ratings were not available:
June 30, 2012 December 31, 2011
Fair Value % of Total Fair Value % of Total
($ in Millions) ($ in Millions)
AAA $ 54.6 41.6 % $ 22.7 34.5 %
AA+ , AA, AA- 6.9 5.2 % 13.1 20.0 %
A+, A, A- 39.6 30.2 % 7.8 11.9 %
BBB+, BBB, BBB- 30.2 23.0 % 22.1 33.6 %
Total Euro-denominated corporate bonds $ 131.3 100.0 % $ 65.7 100.0 %
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Financial Strength Ratings
Financial strength ratings represent the opinions of rating agencies on our
capacity to meet our obligations. Some of our reinsurance treaties contain
special funding and termination clauses that are triggered in the event that we
or one of our subsidiaries is downgraded by one of the major rating agencies to
levels specified in the treaties, or our capital is significantly reduced. If
such an event were to happen, we would be required, in certain instances, to
post collateral in the form of letters of credit and/or trust accounts against
existing outstanding losses, if any, related to the treaty. In a limited number
of instances, the subject treaties could be cancelled retroactively or commuted
by the cedant and might affect our ability to write business. Our principal
operating subsidiaries are rated "A-" (Excellent) with a stable outlook by A.M.
Best Company ("A.M. Best"), which rating is the fourth highest of 16 rating
levels, and BBB+ (Good) with a stable outlook by S&P, which is the sixth highest
of 21 rating levels.
Other Material Changes in Financial Position
The following summarizes other material changes in the financial position of
the Company as of June 30, 2012 and December 31, 2011.
June 30, 2012 December 31, 2011
($ in Millions)
Reinsurance balances receivable, net $ 495.7 $ 423.4
Prepaid reinsurance premiums 44.4 35.4
Deferred commission and other
acquisition expenses 270.0 248.4
Reserve for loss and loss adjustment
expenses (1,522.8 ) (1,398.4 )
Unearned premiums (974.3 ) (832.0 )
In general, the increases in these balances reflect the continued growth of the
Company in each of its segments as previously described. The change in deferred
commission and other acquisition expenses reflects the ongoing implementation of
new accounting standards for this caption, and as a result is growing at a
slightly lower rate than the other balance sheet captions described in this
table.
Capital Resources
Capital resources consist of funds deployed or available to be deployed in
support of our business operations. Our total capital resources at June 30, 2012
and December 31, 2011 were as follows:
June 30, 2012 December 31, 2011
($ in Millions)
Senior notes $ 207.5 $ 107.5
Junior subordinated debt 126.3 126.3
Maiden shareholders' equity 824.3 768.6
Total capital resources $ 1,158.1 $ 1,002.4
Ratio of debt to total capital resources 28.8 % 23.3 %
As of June 30, 2012, our shareholders' equity was $824.3 million, a 7.2%
increase compared to $768.6 million as of December 31, 2011. The increase was
due primarily to the net income for the six months ended June 30, 2012 of $34.9
million, change in unrealized gains on investments of $30.1 million and foreign
currency translation adjustment of $1.4 million offset by dividends declared of
$11.6 million.
On March 27, 2012, the Company, completed an offering of $100.0 million
aggregate principal amount of 8.00% Senior Notes due on March 27, 2042. The 2012
Senior Notes are redeemable for cash, in whole or in part, on or after March 27,
2017, at 100% of the principal amount to be redeemed plus accrued and unpaid
interest to but excluding the redemption date. The net proceeds from the 2012
Senior Notes will be used for working capital and general corporate purposes.
On June 24, 2011, the Company completed an offering of $107.5 million aggregate
principal amount of 8.25% Senior Notes due June 15, 2041, including $7.5 million
aggregate principal amount of 2011 Senior Notes to be issued and sold by the
Company pursuant to the underwriters' exercise in part of their over-allotment
option. The 2011 Senior Notes are redeemable for cash, in whole or in part, on
or after June 15, 2016, at 100% of the principal amount of the 2011 Senior Notes
to be redeemed plus accrued and unpaid interest to but excluding the redemption
date.
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The net proceeds from the 2011 Senior Notes Offering were approximately $104.7
million, after deducting the underwriting discount and estimated offering
expenses. With the underwriters' exercise part of a portion of their
over-allotment option, the Company repurchased $107.5 million aggregate
liquidation amount of TRUPS Offering on July 15, 2011. Pursuant to the terms of
the TRUPS Offering, in the second quarter of 2011, the Company incurred a
non-recurring call premium charge of approximately $15.1 million. At that time,
the Company has also incurred an additional non-recurring non-cash charge of
$20.3 million, which represents the accelerated amortization of original issue
discount and issuance costs associated with equity issued along with the TRUPS
Offering.
The Company expects to continue to evaluate additional opportunities to
refinance the TRUPS Offering securities at lower, more cost-effective interest
rate levels. To the extent that such refinancing does occur prior to January 20,
2014, the Company may incur additional interest penalties pursuant to the terms
of the TRUPS Offering. Under the terms of the TRUPS Offering, the Company can
repay the principal balance in full or in part at any time. However, if the
Company repays such principal within five years of the date of issuance, it is
required to pay an additional amount equal to one full year of interest on the
amount of Trust Preferred Securities repaid. If the remaining amount of the
Trust Preferred Securities were repaid within five years of the date of
issuance, the additional amount due would be $21.4 million, which would be a
reduction in earnings.
The net proceeds from the 2012 Senior Notes Offering may be used to repurchase
the Company's outstanding 14% Trust Preferred Securities but at the present
time, the Company does not anticipate using the proceeds for such purposes. The
Company's objective would be to generate recurring interest expense savings that
would match or exceed the cost of any such interest penalty. However, it is
possible this may not occur depending on market conditions and other factors
beyond the Company's control.
The value of the common shares issued to purchasers of the Trust Preferred
Securities are being carried as a reduction of the liability for the Trust
Preferred Securities with the value being amortized against the Company's
earnings over the 30-year term of the Trust Preferred Securities. At June 30,
2012, the unamortized amount carried as a reduction of the Company's liability
for the Trust Preferred Securities was $26.2 million. If the Company were to
repay the remaining Trust Preferred Securities in full or in part at any time
prior to their maturity date, the Company would have to recognize a commensurate
amount as a reduction of earnings at that time.
Currency and Foreign Exchange
We conduct business in a variety of non-U.S. currencies, principally the Euro,
the British pound and the Swedish krona. Our reporting currency is the U.S.
dollar, and exchange rate fluctuations relative to the U.S. dollar may
materially impact our results and financial position. The Company also has
exposure to foreign currency risk due to both its ownership of its non-U.S.
subsidiaries and divisions, and to collection of premiums and paying claims and
other operating expenses in currencies other than the U.S. dollar and holding
certain net assets in such currencies. The Company's most significant foreign
currency exposures are to the Euro and the British pound.
We measure monetary assets and liabilities denominated in foreign currencies at
period end exchange rates, with the resulting foreign exchange gains and losses
recognized in the Consolidated Statements of Income. Revenues and expenses in
foreign currencies are converted using the average foreign exchange rates during
the periods reported.
For the translation of the Company's subsidiaries' and divisions' financial
statements whose functional currency is other than the U.S. dollar, assets and
liabilities are converted into U.S. dollars using the rates of exchange in
effect at the balance sheet dates, and revenues and expenses are converted using
the average foreign exchange rates for the period. The effect of translation
adjustments are included in the foreign currency translation adjustment, which
is a separate component of accumulated other comprehensive income in
shareholders' equity.
Net foreign exchange (losses) gains amounted to $(0.9) million and $0.1 million
during the three and six months ended June 30, 2012 compared to net foreign
exchange gains of $0.9 million and $2.0 million for the same periods in 2011,
respectively.
Effects of Inflation
The effects of inflation are considered explicitly in pricing and implicitly in
estimating reserves for unpaid losses and loss expenses. The effects of
inflation could cause the severity of claims to rise in the future. To the
extent inflation causes these costs, particularly medical treatments and
litigation costs, to increase above reserves established for these claims, the
Company will be required to increase the reserve for losses and loss expenses
with a corresponding reduction in its earnings in the period in which the
deficiency is identified. The actual effects of inflation on the results of
operations of the Company cannot be accurately known until claims are ultimately
settled.
Off-Balance Sheet Arrangements
As of June 30, 2012, we did not have any off-balance sheet arrangements as
defined by Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
See Item 1, Note 2 to the Condensed Consolidated Financial Statements for a
discussion on recently issued accounting pronouncements not yet adopted.
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