Maiden Holdings, Ltd. Annual Report 2012

Plain-text annual report

Building on a Strong Foundation 2012 ANNUAL REPORT M aiden Holdings, Ltd. (Nasdaq: MHLD) is a Bermuda- headquartered holding company with subsidiaries that provide reinsur ance and insur ance products and services to the regional and specialty global property and casualty markets. Our differentiated model is focused on delivering profitable results that are stable and predictable while meeting the non-catastrophic reinsur ance capital needs of our clients. We seek to build close, long-term partnerships with our clients through a value-added, customer-centric approach. Maiden has underwriting oper ations in both Bermuda and the United States, and production teams in the United Kingdom, Germany and other select markets throughout the globe. 2012 with a relentless focus on customers, Maiden has been profitable every year since its inception. In 2012, the Company achieved diluted oper ating earnings per common share of $0.66, on record net written premium of $1.9 billion, while book value per share increased 12.4% to $11.96. Maiden Holdings, Ltd. 2012 Annual Report Maiden at a Glance Bermuda (cid:79) United States (cid:79) United Kingdom (cid:79) Germany The Maiden Difference Objective: To serve the non-catastrophic reinsurance needs of regional and specialty insurers while delivering stable, profitable underwriting performance and strong operating returns. Business Focus: We focus on delivering long-term, non- catastrophic reinsurance solutions, primarily to regional and specialty property & casualty insurers. We provide lower or “working” layer reinsurance support focusing on the more predictable and actuarially credible segments of our clients’ reinsurance programs. Our focus helps us to avoid the volatility associ- ated with severity events such as catastrophes and also to mitigate the impact of market cycles by developing long-term solutions for our clients. We aspire to be our clients’ primary reinsurance relationship and to play a significant role in meeting their long-term reinsurance needs. Our long-term partnerships result in a stable book of business. History: Founded in 2007, the core of our platform is the former GMAC RE business, which has a 29-year history of steady, long-term client relationships averaging more than 5 years. Several of Maiden’s senior managers were former leaders of the GMAC reinsurance and insurance businesses. Client Support: The fully collateralized Dedicated Financial Trust® is a customized solution, which provides exceptional financial stability. Each U.S. client with more than $1 million of liabilities has access to an individually segregated trust account backed by highly rated, liquid assets. This unique solution pro- vides full trans parency and generates exceptional customer loyalty. Customer Relationships: We learn each client’s business in depth to provide customized reinsurance solutions. Each account is served by a multi-functional team, including underwriters, actuaries, accountants and claims specialists. They each work closely together to develop custom solutions that meet the unique needs of each client, as well as provide value-added services above and beyond the reinsurance contract. Financial Strength: Maiden’s disciplined business model has maintained profitable underwriting results every year since our formation. Our strong capital position is based upon more than $4.1 billion of assets. Our principal operating subsidiaries are rated A- (Excellent) by A.M. Best and BBB+ (Good) by Standard & Poor’s. Diversified Oper ations and Str ategic Relationships Maiden is a diversified property and casualty reinsurer serving a wide range of clients. We have also entered into significant quota share reinsurance agreements with two key strategic partners. Diversified Reinsur ance (40% of NPW). In the U.S., Maiden Re primarily provides property and casualty reinsur- ance for regional and specialty insurers. Our clients typically focus on personal auto, homeowners, commercial auto, commercial multi-peril, general liability, and workers’ compensation insurance. We provide treaty and facultative reinsurance support on either a quota share or excess of loss basis. Internationally, we work with original equipment automobile manufacturers and related credit providers to design and implement personal auto and credit life insurance programs. These programs are generally underwritten with local insurance com- panies, and Maiden’s International Insurance Services (“IIS”) unit pro- vides business development and reinsurance product support. Based in the U.K., the international business is mostly generated in Europe and underwritten through our Bermuda operations. In 2012, Diversified Reinsurance had $795.3 million of earned premium, at a combined ratio of 102.5% . Str ategic Relationships. Maiden’s multi-year quota share agreements with specialty insurers AmTrust Financial Services, Inc. (“AmTrust”) and American Capital Acquisition Corporation (“ACAC”) provide a solid foundation of predictable long-term revenues and profit- able growth. AmTrust (44% of NPW). Maiden’s relationship with AmTrust primarily involves a 40% quota share agreement on a highly diversified portfolio of business. AmTrust’s business is comprised of small commercial business insurance, including workers’ compensation, commercial package and other com- mercial lines, as well as specialty risk and extended warranty coverage for consumer and commercial goods. In 2011, Maiden expanded its relationship to include AmTrust’s European Hospital Liability business, which is evaluated annually for renewal. In 2012, Maiden’s AmTrust segment produced $727.8 million of earned premium at a combined ratio of 95.8% . ACAC (16% of NPW). Maiden’s multi-year 25% quota share agreement with ACAC focuses mainly on a portfolio of personal auto insurance in select U.S. markets. The ACAC quota share relationship produced $280.7 million of earned premium at a combined ratio of 97.2% . Selected Financial Highlights (in millions, except per share data) Net premiums written Net premiums earned Net investment income Underwriting income Income from operations(1) Net income (2) Operating earnings(1) Earnings per common share Operating earnings per common share (1) Combined ratio Investable assets(1) Total assets Shareholders’ equity Operating return on average shareholders’ equity(1) Book value per common share Common stock price Market capitalization Year ended December 31 2012 $ 1,901 1,804 2011(2) 2010 $ 1,724 $ 1,228 1,552 1,170 81 19 92 50 49 75 43 105 29 70 72 50 114 70 73 $ 0.64 $ 0.66 $ 0.39 $ 0.96 $ 0.98 $ 1.02 99.5% 98.1% 96.9% $ 3,030 4,138 $ 1,015 $ 2,524 3,395 $ 769 $ 2,353 2,983 $ 750 5.9% 9.2%% 10.2% $ 11.96 9.19 $ 665 $ 10.64 8.76 $ 633 $ 10.40 7.86 $ 567 1. Income from operations, operating earnings, and the related metrics operating earnings per common share and operating return on average common shareholders’ equity, as well as investable assets, are non-GAAP financial measures. Operating earnings are defined by the Company as net income before net realized investment gains (losses), foreign exchange, and other gains (losses), nonrecurring general and administrative expenses relating to acquisitions, intangibles amortization, and non-cash deferred tax charges and should not be considered as an alternative to net income. Please see the disclosure on non-GAAP Financial Measures on page 76 of this Annual Report on Form 10-K for additional information and reconciliation to GAAP for operating earnings, operating earnings per common share, and operating return on average common shareholders’ equity. Please see the inside back cover for additional information and reconciliation to GAAP for income from operations and investable assets. The Company’s management believes that income from operations, operating earnings, operating earnings per common share, operating return on common equity, and investable assets are useful indicators of trends in the Company’s underlying operations. The Company’s measure of income from operations, operating earnings, operating earnings per common share, operating return on common equity and investable assets may not be comparable to similarly titled measures used by other companies. 2. Maiden’s net income was impacted by certain non-recurring charges in 2011. These include charges related to the repurchase of junior subordinated debt with proceeds from the June 2011 Senior Notes offering. 2011 results include $15.1 million of junior subordinated debt repurchase expenses and $20.3 million of accelerated amortization of subordinated debt discount and issuance costs. 2012 Business Distribution in $ millions net premiums written Total Assets in $ millions $2,983 $3,395 $4,138 1 Personal Auto $554 2 Workers’ Compensation $392 3 Commercial Auto $199 4 Warranty $167 5 Other Liability $159 6 Other Lines $131 7 European Hospital Liability $106 8 Fire, Allied Lines and Inland Marine $68 9 Commercial Multi-Peril $61 10 Accident & Health $36 11 Homeowners’ $28 109 11 8 7 1 6 5 4 2 3 2010 2011 2012 Dear Shareholders Oper ations in Bermuda, U.S. and Europe In 2012, Maiden continued to make solid progress in developing its underwriting portfolio, and importantly, strengthening its balance sheet. In doing so the Company remained focused on its core strategy as a highly differentiated reinsurer providing non-catastrophe working layer reinsurance support to its regional and specialty insurer clients in the United States, Europe and select global markets. Unlike more severity or volatility oriented reinsurers, our underwriting emphasizes traditional and lower volatility lines of business, providing clients with expert risk analysis and operational flexibility, while maximizing capital support. To ensure that our balance sheet supports the continued growth in our business, we completed two long-term oriented capital raising transactions. As we consider our prospects for 2013, we are confident that we are beginning the new year from a position of strength. Notwithstanding the accomplishments and successes of 2012, the industry was again reminded of the significant force and impact that natural hazard catastrophes can have on the marketplace as it responded to Superstorm Sandy (“Sandy”). For Maiden, while the impact on our results in the fourth quarter was significant, our results were within our risk tolerances for an event of this magnitude. Despite the fourth quarter impact, Maiden produced a full year underwriting profit and solid net and operating income for the full year. In fact, 2012 marked the Company’s sixth consecutive year of profitable underwriting performance. Oper ating Results In 2012, Maiden increased its book value per common share to $11.96 per share, representing growth of 12.4% . Despite the impact of Sandy, our full year 2012 operating return on equity remained positive at 5.9% , compared to 9.2% in 2011. Maiden’s shareholders’ equity at December 31, 2012 stood at $1.02 billion compared to $769 million a year ago and reflects both organic growth and the successful completion of our preference share issuance in the third quarter of 2012. The growth in our shareholders’ equity will serve to support our business development activities in 2013 and ultimately could be used to significantly reduce our cost of capital in early 2014, when the call premium for Maiden’s 14% coupon Trust Preferred Securities (“TRUPS”) expires. From an underwriting perspective, and inclusive of the impact of Sandy, our combined ratio was 99.5% compared to 98.1% in 2011. Maiden does not write catastrophe reinsurance business, however, as we have stated in the past, we do write property exposed business which can produce losses resulting from extreme catastrophic events. While Maiden’s losses were consistent with our expectations for a storm as significant as Sandy, going forward, we are committed to further reducing our aggregate exposure, particularly from our U.S. Excess and Surplus lines (“E&S”) property portfolio, Maiden Specialty, where the majority of this loss emanated. In contrast, in our U.S. treaty reinsurance portfolio, our losses from Sandy were favorable to modeled values and the portfolio performed very much in-line with our lower volatility strategy. There was also a small exposure to Sandy within the ACAC business segment. Absent this impact, our full year combined ratio was 97.8%, an improvement from the 2011 combined ratio of 98.1% and our operating ROE would be 9.6% . Importantly, this reflects a favorable trend to the prior year and improvements in elements of the portfolio that are benefiting from primary insurer rate strengthening. We believe that further reducing our exposure to natural hazard catastrophic events will further benefit the stability of Maiden’s performance. Supporting our Clients Maiden maintained its focus on supporting the capital position of our clients. In addition to providing stable capital support through our customized reinsurance solutions, Maiden demonstrated its support by working with our clients impacted by Sandy to ensure timely payment of their claims. The profitable growth of our business is the best illustration of our continued support of our regional and specialty insurer clients. From an overall perspective, net premiums grew to $1.90 billion in 2012 from $1.72 billion in 2011, an increase of 10.3% . The Diversified Reinsurance segment, which includes our U.S. underwriting unit, Maiden Re; our international business development team, IIS; and certain business from our Bermuda reinsurance company, Maiden Bermuda, produced net premiums written of 1 Maiden Holdings, Ltd. 2012 Annual Report $765.3 million in 2012, down 4.1% compared to 2011. The reduction in Diversified net written premium resulted largely from the termination of a large under-performing quota share account and to a lesser extent from a client decision to retain more premium. As clients’ balance sheets grow, their need for pro-rata reinsurance support can diminish. Additionally, comparative period 2011 revenue growth included incoming unearned premium reserve portfolios on several accounts, which are non- recurring in 2012. In our IIS business development unit, year-on-year revenue was essentially flat. Much of our efforts in this segment continue to focus on the expansion of our automobile original equipment manufacturer branded customer insurance programs. Shortly after we acquired the business, we eliminated a number of poor performing accounts. While total revenue is flat year-on-year, the team has offset the impact of those terminated accounts with new opportunities. Toward the end of 2012 we added a Business Development Executive who will focus on expanding this business model in Latin America. Across the IIS unit, we are evaluating a number of opportunities to increase the historically profitable credit life component of this portfolio in 2013. Going forward, one of the key growth opportunities for Maiden’s IIS business is the replication of our regional and specialty focused reinsurance business as we concentrate on the needs of small- to mid-sized insurers. We are in the process of recruiting an experienced executive to lead this effort. Our two largest clients, AmTrust and ACAC, continue to enjoy healthy growth. In 2012, net premiums written for the AmTrust Quota Share Reinsurance segment were $840.3 million, an increase of $171.0 million or 25.6% compared to 2011, reflecting growth in all segments. While continued successful acquisition activity drives some of the increase, rate strengthening and organic growth in active clients have also favorably impacted premium volume. In particular, rate firming in the U.S. is benefit- ing growth in all of AmTrust’s key segments. Net premiums written for the ACAC Quota Share rose 15.4% in 2012, to $295.7 million compared to 2011, as they continue their niche strategy of expanding in select markets. Underwriting Performance The profitability of our operating segments varied across our lines of business. The Diversified Reinsurance business segment produced a combined ratio of 102.5% in 2012 as the majority of Maiden’s Sandy losses came from this segment. Excluding the impact of Sandy, the Diversified Reinsurance combined ratio would be 98.9% . However, this is still above our targeted combined ratio, due to the adverse impact of our German auto quota share in 2012 at IIS and the impact of a large poorly performing commercial auto account at Maiden Re in the U.S. We anticipate that implementation of significant underwriting changes, enhanced claims processes, and rate increases will improve the performance of the German auto quota share account in 2013. With regard to the adverse performance of the Maiden Re commercial auto account, our participation on that account had already been terminated and we do not anticipate continued adverse impact from this business. In the fourth quarter of 2012, we completed a comprehensive audit of all of the remaining outstanding claims. Going forward, we are targeting improved underwriting performance for these segments in 2013 and beyond. We have made progress in improving overall rate levels across the platform. Additionally, we are continuing to see solid growth in our lower layer highly profitable facultative casualty business. We anticipate further growth in this segment in 2013. We continue to see pricing strength in AmTrust core markets and underlying performance reflects favorable results. The AmTrust Quota Share segment recorded a combined ratio of 95.8% for 2012, which is within our target expectation and reflects improvement from the 97.3% combined ratio in 2011. Importantly, the impact of pricing actions is having a favorable effect on performance. The ACAC segment reported a combined ratio of 97.2% for the year, compared to 97.7% in 2011. The ACAC contract has a variable commission feature; however, the fourth quarter combined ratio of 99.1% exceeded the upper end of that variable commission swing rate, primarily as a result of Sandy related losses. We are confident that some of the actions ACAC has taken will improve the results of their business over time. On balance, we are pleased with our continued progress in both growing the business and enhancing our underwriting performance. 2 Growing Investments In addition to underwriting, investment returns are a key driver of Maiden’s profitability. Despite a highly challenging environ- ment for fixed income investing, Maiden’s net investment income increased to $81.2 million for the year ended December 31, 2012, an improvement of 8.4% compared to 2011. Total investments grew $598.7 million or 29.6% to $2.6 billion versus December 31, 2011. At the end of 2012, the invested asset portfolio was comprised primarily of corporate bonds and U.S. Agency mortgage backed securities, with corporate bonds representing 52% of our invested assets, while U.S. Agency MBS made up 38% of the portfolio. Maiden experienced significant pre-payments on mortgage backed securities during 2012, which resulted in the receipt of $438.8 million in cash, which is $155.3 million more than 2011. In addition, we invested the $250 million in proceeds from our two capital markets transactions. In all, investable assets increased 20% to $3.0 billion in 2012. The book yield at year-end 2012 on the fixed income portfolio (excluding cash) was 3.48% with an average duration of 3.55 years com- pared to a book yield of 3.59% and average duration of 2.78 years at the end of 2011. The new money yield during 2012 was 3.32% compared to a new money yield of 3.59% during 2011. Financial Strength and Flexibility In 2012, we continued to build our balance sheet, which is optimized to efficiently utilize capital for the benefit of shareholder returns. Maiden’s capital base was substantially strengthened in 2012 through opportunistic and diversifying capital raises, as well as operating profits. We finished 2012 with $1.3 billion in capital. We were pleased to be able to complete two capital markets transactions totaling $250 million. In March we issued $100 million 30-year, 8% Senior Notes to support our growth and further strengthen our balance sheet. In August we saw an opportunity to access the preferred share market for the first time and issued $150 million of non-cumulative perpetual preference shares. Along with this offering, the Board of Directors authorized a common share repurchase authorization of up to $75 million. The share buy-back authorization provides us with an additional tool with which to manage our capital position. Separately, in November, the Board of Directors increased Maiden’s common share dividend by 12.5% to $0.09 per share. An important aspect of our prospective capital management activities is the potential to repurchase our TRUPS. We therefore weigh all other capital management actions, including share repurchases against the meaningful and permanent impact of repurchasing the remaining outstanding TRUPS. Building on a Strong Foundation Overall, 2012 was a successful year for Maiden as we continued to build out our platform and strengthen our capital position. While the impact of Sandy was disappointing, we believe that our results continue to highlight the lower volatility nature of our business model, despite the enormity of Sandy. As mentioned previously, we are taking further appropriate actions to significantly reduce the catastrophe exposed elements from our E&S property business, which should mitigate our exposure to a similar event in the future. Maiden’s differentiated business model is focused on delivering value to our shareholders through serving the unique needs of regional and specialty insurers while maintaining underwriting discipline, leveraging operational and balance sheet efficiency, and effective capital management. We are confident that we are beginning 2013 from a strong foundation and with positive momentum. On behalf of the Board of Directors, we would like to thank our dedicated staff, shareholders and other stakeholders for their continued support. In the next year we will continue to focus on delivering shareholder value through enhancements to our earnings streams and effective capital management activities. Arturo M. R aschbaum President and Chief Executive Officer Barry D. Zyskind Chairman of the Board of Directors 3 Maiden Holdings, Ltd. 2012 Annual Report 231% Since the tr ansformative acquisition of the GM AC RE business in 2008, M aiden’s 231% total return1 to shareholders, including dividends, far exceeds the 102% return of a peer-group* index of Bermuda-based property and casualty companies and the 74% return of the S&P 500, as of December 31, 2012. (1) Source SNL Financial. Total return of a security 11/11/2008 to 12/31/2012, including price appreciation and the reinvestment of dividends. Dividends are assumed to be reinvested at the closing price of the security on the ex-date of the dividend. (*) Bermuda P&C Companies include: Aspen, Alterra, Arch, Axis, AWAC, Endurance, EverestRe, Montpelier, PartnerRe, Platinum, RenRe, Validus, XL. Maiden Milestones 2007 June: Formation of Maiden Holdings, Ltd. Maiden enters quota share agreement with AmTrust Financial Services, Inc., on a diversified com- mercial insurance portfolio. 2008 May: Maiden begins trading on NASDAQ under the symbol “MHLD.” October: Acquires GMAC RE, forming the basis of the Company’s diversified reinsurance operations, Maiden Re. 2009 January: Completes $260 million offering of 14% trust preferred shares (TRUPS) to support the GMAC RE acquisition. 2010 March: Maiden forges quota share agreement with American Capital Acquisition Corporation (“ACAC”), a U.S. personal auto insurer. November: Acquires assets and liabilities of GMAC International Insurance Services, Ltd., a plat- form for international expansion. 4 Charting a New Course in the Reinsur ance Industry Maiden Re set out in a new direction as a specialty reinsurer of low-volatility, working-layer exposures for smaller and mid-sized regional and specialty insurers. Our differentiated, fully collateralized and individually segregated Dedicated Financial Trust®, provides an exceptional degree of security for all accounts with liabilities of more than $1 million. After successfully establishing a reputation for reliability, flexibility and extraordinary value- added customer service, Maiden continues to take steps to expand from its predominantly U.S.-oriented customer base to introduce the Maiden model to Europe and Latin America. Maiden Milestones 2011 June: Maiden refinances $107.5 million of the 14% TRUPS at the more favorable rate of 8.25% via issuance of $107.5 million of 30-year notes. 2012 March: Maiden issues $100 million of 30-year 8% senior notes. August: Issues $150 million of 8.25% preference shares. Together, these offerings provide funding capable of potentially redeeming the remaining 14% TRUPS in January 2014. 5 November: Superstorm Sandy hits Northeastern U.S. Despite high losses for the broader rein- surance industry, Maiden’s lower volatility non-catastrophe model limits its losses on a relative basis. December: Maiden concludes another year of profitable underwriting. Book value per share rises to $11.96. Net written premiums reach $1.9 billion. Employee count stands at 213. Maiden Holdings, Ltd. 2012 Annual Report Strong Client Relationships At Maiden, we take the time to get to know our clients and their business, working with them face to face in order to structure creative, customized reinsurance solutions. To each account we dedicate multi-disciplinary teams of professionals, including actuaries, underwriters, accountants and claims experts, to assist clients with any aspect of their business that may need assistance, and to provide value-added services that exceed the standard requirements of the reinsurance transaction. We aim for a high rate of retention, which reached 94% for our Maiden Re treaty reinsurance clients in 2012. 6 A Commitment to Our Core Philosophy Net Premiums Written in $ millions $1,228 $1,724 $1,901 2010 2011 2012 Stable, non-catastrophe business Long-term client relationships Multidisciplinary teams Dedicated Financial Trust® Our Key to Success Since our founding, Maiden has been dedicated to a philosophy of achieving stable, predictable returns by focusing on reinsurance exposures with low-volatility, while nurturing long-term, collaborative customer relationships. We provide exceptional security by maintaining a strong balance sheet and offering our fully collateralized Dedicated Financial Trust®. We reinforce our relationships through customized reinsurance solutions accompanied by an exceptional level of value-added service provided by dedicated multifunctional teams assigned to each client. Through this commitment, we have differentiated Maiden from other reinsurers and have built a solid, growing business upon a strong financial foundation. Unwavering adherence to our philosophy again proved its worth in 2012. Although we have historically avoided the wide swings of profit and loss that catastrophe reinsurers regularly experience, our exposure to ordinary working layers, especially in commercial property lines, resulted in inevitable losses brought about by Superstorm Sandy, dampening our otherwise rewarding year. Despite Sandy’s impact, our careful underwriting—which by design should limit our potential exposure to no more than one year’s earnings for even the most extraordinary 1-in-250-year events—produced profitable year-end results. Our balance sheet remained strong and our sound capital base has grown. Importantly, Sandy provided a shining opportunity to display Maiden’s exemplary culture of customer service. We swiftly responded to assess Sandy’s impact on our customers and paid their claims rapidly. We demonstrated our skill, flexibility and reliability by helping our customers determine and fulfill their needs. Many of our clients who were impacted by this storm have seen their capital levels weakened, and Maiden is working with these companies to develop reinsurance solutions to help fortify their capital structures. Our ability to develop deep, mutually rewarding client relationships—with our diversified base of small- to mid-sized regional and specialty insurers as well as with our two large quota-share clients, AmTrust and ACAC—has always been a distinguishing Maiden feature. By intimately understanding each client’s business, Maiden can serve as its primary reinsurance provider and assume a large share of its capital needs. This was instrumental in achieving industry-leading efficiency and an extraordinary level of client retention. In turn, it enabled us to increase our written premium in business that met our high standards for risk-adjusted profitability, and helped increase in our investable assets to $3.0 billion. $1.9 Billion In 2012, written premium grew to $1.9 billion, up 10.3% over the prior year, while earned premium grew 16.2% to $1.8 billion. Maiden targets a long-term aver age net written premium growth of 10%. 7 Maiden Holdings, Ltd. 2012 Annual Report A Year of Fine-Tuning Our Business Net Premiums Earned in $ millions $1,170 $1,552 $1,804 2010 2011 2012 We have assembled a high quality portfolio of diversified property and casualty business. We seek to grow these accounts and are well positioned to pursue attr active new opportunities in an improving marketplace. Integr ation and Improvement Following several years of extraordinary growth, 2012 was a period to digest acquisitions and hone new initiatives. We made numerous improvements in our products and services. We enhanced one of our most successful products, AMP, our automated mod- eling and pricing tool, which enables facultative reinsurance clients to easily rate, quote and bind risks online, based on preset guidelines. Launched online in 2009, AMP continued to attract new customers in 2012. For our treaty customers, we remain committed to developing a wide range of specialized resources in areas such as analytics, predictive modeling and compliance. We are researching pre-underwriting tools to help clients make better underwriting decisions, giving smaller insurers capabilities enjoyed by their larger competitors. Internally, we launched a tool that aggregates information from a variety of sources—incorporating such data as a com- pany’s performance, its competitive landscape and local regulatory standing —to allow Maiden to evaluate potential risks more thoroughly. Still in its early stages, such a tool could eventually be made available to others for a fee. The development of fee-based resources, to enhance our reinsurance business, is an avenue we are actively exploring. On the international front, we have focused on integrating and developing our IIS platform, which is a small but promising business area. One of the primary drivers of this business is the German auto market, which has unfortunately softened, both in terms of vehicle sales and auto insurance pricing. Despite current challenges, we remain committed to the long-term viability of this market and formally restructured our major partner relation- ship and reoriented the operation to focus on profitability. We integrated its underwriting into Maiden Insurance in Bermuda, which underwrites all of our international business. We also expanded it into the Netherlands and saw good growth from a small base in the U.K. and Russia. We increased our presence in Latin America, where, as in Europe, we are engaged in developing new markets for branded auto insurance products. Our objective is to help clients specifically design products for these geographic areas and then for Maiden to generate income from both the product design and the reinsurance opportunity. Our larger goal is to replicate the Maiden Re model abroad, to serve small and mid-sized regional and specialty insurers overseas. 2.9% Maiden’s industry-leading gener al & administr ative expense r atio reflects our scalable infr astructure and outstanding oper ating efficiency, which further improved over last year’s excellent results. 8 Our Principal Financial Levers for Maximizing Performance Shareholders’ Equity in $ millions $750 $769 $1,015 2010 2011 2012 Our strengthened capital base has given us the flexibility to pursue sever al attr active options: to grow our business, redeem our high-coupon TRUPS and repurchase our common shares. Three Levers To improve our financial performance, Maiden is keenly focused on three financial levers: lowering our combined ratio, reducing our cost of capital and improving investment income. Lowering our combined ratio will require maintaining our strict underwriting discipline. Premium rates have begun to improve for our clients in the primary market. However, the reinsurance market remains over-capitalized and competitive. Maiden’s strategy of participating in significant shares of our clients’ working layer reinsurance, combined with our strong client relationships, naturally results in less commoditized pricing. We will continue to work with existing and new clients to develop reinsurance programs that provide value to our clients and underwriting profits for Maiden. We made tremendous strides towards lowering our cost of capital in 2012. We took advantage of favorable market conditions and our strong credit quality to raise $250 million at attractive rates in two separate capital markets transactions. These deals strengthened our balance sheet and enhanced our financial flexibility. One of the possible uses for this fresh capital may be to redeem our remaining $152.5 million of 14% trust preferred securities in January 2014, when they are callable without the prepayment penalty. Finally, improving investment income in the current low-interest-rate envi- ronment remains a challenge. We refrain from reaching for yield and remain committed to a conservative posture, investing primarily in highly secure government agency mortgage-backed securities and investment grade corporate debt. Nevertheless, at a short duration of 3.55 years, our portfolio is liquid and positions Maiden to take advantage of any increase in interest rates that may inevitably occur. Moreover, our growth in investable assets, to $3.0 billion, has enabled us to increase our total investment income by 8.4% to $81.2 million in 2012. Our medium-term goal remains to achieve a 15% return on equity. Our low- volatility business lets us employ our balance sheet with great efficiency, so that each point of improved combined ratio results in approximately two points of ROE. Redeeming our 14% trust preferreds will also improve our ROE, while 0.5% of increased investment yield translates into another 1.5 points of ROE. Thus, with diligence and moderately improving market conditions, a 15% return on equity is within our sights. $3.0 Billion The build-up of our investable assets to $3.0 billion has supported growth of total investment income, despite falling interest r ates in 2012. 9 Maiden Holdings, Ltd. 2012 Annual Report Rewarding Our Shareholders Book Value per Basic Share in $ $10.40 $10.64 $11.96 2010 2011 2012 2012 ACHIEVEMENTS: Growth in Book Value to $11.96 per share Dividend Increase of 12.5% Share Repurchase Authorization of $75 Million Long-Term Oriented Capital R aises Totaling $250 Million A Consistent, Long-Term Approach Maiden maintains an acute focus on delivering shareholder value as the business continues to develop and evolve. Our intention is to provide stable, steadily increasing returns and consistently enhance the Company’s value. In addition to our determined pursuit of 15% return on equity, one of the key metrics by which we measure increasing shareholder value is through the growth in our book value per share. In 2012, book value per common share rose once again, to $11.96, up 12.4% from the previous year. We also again raised our dividend, as we have done every year since our founding, to yield a highly attractive 3.9% on an annualized basis as of December 31, 2012. We also accelerated our dividend payment at year-end to enable shareholders to take advantage of favorable prevailing tax rates. Maiden is committed to giving shareholders a steady, tangible reward and views a healthy dividend as a sign of a vibrant enterprise. The $250 million of capital we raised during the year was accomplished in a shareholder-friendly manner, strengthening our capital base without diluting equity holders. It gave us the means to eventually redeem our high-coupon 14% trust preferred securities and presented the additional option of return- ing value to shareholders through the repurchase of common shares. Along with many others in our industry, Maiden’s shares have been trading at an historically large discount to book value. As a result, the Board authorized the repurchase of up to $75 million worth of our common shares, which we can execute when the opportunity appears most appropriate. During 2012 we were pleased to see the universe of Maiden’s shareholders broaden, as a wider population of institutional investors, pursuing a growing range of investment strategies, recognized the long-term opportunity that Maiden represents and sought to learn more about our Company. Finally, the most shareholder-friendly activity we can undertake is to con- tinue to build on the strong foundation we have established—to deliver on our business objectives, excel in reinsurance underwriting, appropriately manage our capital, develop the most promising business opportunities and provide exceptional customer service. 3.9% A 12.5% increase brought the quarterly dividend to 9 cents per share, for an annualized yield of approximately 3.9%, 10 FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2012 OR □ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: 001-34042 MAIDEN HOLDINGS, LTD. (Exact Name of Registrant As Speciﬁed in Its Charter) Bermuda (State or Other Jurisdiction of Incorporation or Organization) 98-0570192 (I.R.S. Employer Identiﬁcation No.) 131 Front Street Hamilton HM 12, Bermuda (Address of Principal Executive Offices and Zip Code) (441) 298-4900 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Shares, par value $0.01 per share Series A Preference Shares, par value $0.01 per share NASDAQ Global Select Market New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Act Yes (cid:4) No (cid:2) Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:2) Indicate by check mark whether the registrant (1) has ﬁled all reports required to be ﬁled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ﬁle such reports), and (2) has been subject to such ﬁling requirements for the past 90 days. Yes (cid:2) No (cid:4) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such ﬁles). Yes (cid:2) No (cid:4) Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the deﬁnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2) Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, a non-accelerated ﬁler, or a smaller reporting company. See the deﬁnitions of ‘‘large accelerated ﬁler’’, ‘‘accelerated ﬁler’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer □ Accelerated Filer (cid:2) Non-Accelerated Filer □ (Do not check if a smaller reporting company) Smaller Reporting Company □ Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Act). Yes (cid:4) No (cid:2) The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2012 (the last business day of the registrant’s most recently completed second ﬁscal quarter) was approximately $449.3 million based on the closing sale price of the registrant’s common shares on the NASDAQ Global Select Market on that date. As of February 25, 2013, 72,421,951 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s deﬁnitive proxy statement to Regulation 14A with respect to the annual general meeting of the shareholders of the registrant scheduled to be held on May 7, 2013 are incorporated by reference into Part III of this Annual Report on Form 10-K. to be ﬁled with the Securities and Exchange Commission pursuant Page 2 36 67 67 67 67 68 70 72 125 128 128 128 130 131 131 131 131 131 131 132 E-1 F-1 MAIDEN HOLDINGS, LTD. TABLE OF CONTENTS PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Item 1. Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties Item 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. PART II Item 5. Item 6. Item 7. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Item 9. Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneﬁcial Owners and Management and Related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Matters Certain Relationships and Related Transactions, and Director Independence . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Special Note About Forward-Looking Statements PART I Certain statements in this Annual Report on Form 10-K, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include in general statements both with respect to us and the insurance industry and generally are identiﬁed with the words ‘‘anticipate’’, ‘‘believe’’, ‘‘expect’’, ‘‘predict’’, ‘‘estimate’’, ‘‘intend’’, ‘‘plan’’, ‘‘project’’, ‘‘seek’’, ‘‘potential’’, ‘‘possible’’, ‘‘could’’, ‘‘might’’, ‘‘may’’, ‘‘should’’, ‘‘will’’, ‘‘would’’, ‘‘will be’’, ‘‘will continue’’, ‘‘will likely result’’ and similar expressions. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Annual Report on Form 10-K should not be considered as a representation by us or any other person that our objectives or plans or other matters described in any forward-looking statement will be achieved. These statements are based on current plans, estimates assumptions and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. Important factors that could cause actual results to differ materially from those in such forward-looking statements are set forth in Item 1A ‘‘Risk Factors’’ in this Annual Report on Form 10-K and include but are not limited to: • • • • • • • results will ﬂuctuate Our long-term prospects; from period to period and may not be indicative of our The property and casualty reinsurance and insurance markets may be affected by cyclical trends; Rating agencies may downgrade or withdraw our ratings; Loss of key executives could adversely impact our ability to implement our business strategy; Our use of reinsurance brokers in contract negotiations and production of business; Our inability to achieve our investment objectives; and Our controlling shareholder approval. shareholders’ ability to determine the outcome of matters requiring We caution that the foregoing list of important factors is not intended to be and is not exhaustive. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law, and all subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualiﬁed in their entirety by this paragraph. If one or more risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. Any forward-looking statements in this Annual Report on Form 10-K reﬂect our current view with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results to place undue reliance on the of operations, growth, strategy and liquidity. Readers are cautioned not forward-looking statements which speak only as of the dates of the documents in which such statements were made. References in this Annual Report on Form 10-K to the terms ‘‘we’’, ‘‘us’’, ‘‘our’’, ‘‘the Company’’ or other similar terms mean the consolidated operations of Maiden Holdings, Ltd. and our consolidated subsidiaries, unless the context requires otherwise. References in this Annual Report on Form 10-K to the term ‘‘Maiden Holdings’’ or ‘‘Maiden’’ means Maiden Holdings, Ltd. only. References in this Annual Report on Form 10-K to $ are to the lawful currency of the United States, unless otherwise indicated. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding. 1 Item 1. Business. General Overview We are a Bermuda-based holding company, primarily focused on serving the needs of regional and the United States, Europe and select other global markets by providing specialty insurers in Bermuda, innovative reinsurance solutions designed to support their capital needs. We also provide customized reinsurance solutions internationally to clients in support of programs we design and implement for original equipment automobile manufacturers (‘‘OEM’s’’). 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. Our principal operating subsidiaries in Bermuda and the United States are rated ‘‘A-’’ (Excellent) with a stable outlook by A.M. Best Company (‘‘A.M. Best’’), which rating is the fourth highest of sixteen rating levels, and BBB+ (Good) with a stable outlook by Standard & Poor’s (‘‘S&P’’), which is the eighth highest of twenty-two rating levels. Our common shares trade on the NASDAQ Global Market under the symbol ‘‘MHLD’’. We provide reinsurance through our wholly owned subsidiaries, Maiden Insurance Company Ltd. (‘‘Maiden Bermuda’’) and Maiden Reinsurance Company (‘‘Maiden US’’) and have operations in Bermuda, the United States, Europe and select other global markets. 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. During 2013, it is our intention to substantially reduce our net exposure to natural hazard events written by Maiden Specialty. Maiden Bermuda does not underwrite any primary insurance business. Internationally, we provide reinsurance-related services through Maiden Global 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 (‘‘EU’’) 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 Förasäkrings AB (‘‘Maiden LF’’), a wholly owned subsidiary of Maiden Holdings, as part of Maiden Global’s service offerings. 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 gross written premium to an amount in excess of $2.0 billion while signiﬁcantly enhancing our capital position to approximately $1.3 billion as of December 31, 2012. These transactions have included the quota share reinsurance agreement with a Bermuda subsidiary of AmTrust Financial Services, Inc. (the ‘‘AmTrust Quota Share’’) in 2007, the acquisition of the reinsurance operations of GMAC Insurance (the ‘‘GMAC Acquisition’’) in 2008, the private placement of trust preferred securities resulting in gross proceeds to the Company of $260.1 million (the ‘‘TRUPS Offering’’) in 2009, and the quota share reinsurance agreement with a subsidiary of American Capital Acquisition Corp. (the ‘‘ACAC Quota Share’’) in 2010. 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 (‘‘IIS’’) in November 2010 (the ‘‘IIS Acquisition’’); Completing a public debt offering of $107.5 million in June 2011 (‘‘2011 Senior Notes’’) and repurchasing a like amount of our outstanding subordinated debenture (the ‘‘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. The 2011 Senior Notes and 2012 Senior Notes may also be referred to as the ‘‘2011 Senior Note Offering’’ or the ‘‘2012 Senior Note Offering’’, respectively, and may collectively be referred to as the ‘‘Senior Note Offerings’’; and 2 • Completing a public offering of $150.0 million Preference Shares-Series A (the ‘‘Preference Shares’’). The Company received net proceeds of $145.0 million from the offering. The Preference Shares trade on the New York Stock Exchange under the symbol ‘‘MHPRA’’. The net proceeds from the offering are expected to be used for continued support and development of our reinsurance business and for other general corporate purposes, which may include repurchasing a portion of the Company’s outstanding common shares and repurchasing the Company’s outstanding 14% 30-year trust preferred securities (‘‘TRUPS’’) issued in January 2009. These signiﬁcant transactions along with other unusual or non-recurring events should be considered when evaluating year-to-year comparability or when comparing our performance with other companies considered our peers and with whom we compete on a regular basis. Additional information on the AmTrust Quota Share and the ACAC Quota Share can be found in this section of the Annual Report Form 10-K captioned ‘‘Our Operating Segments’’. Please also see the section entitled ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in this Annual Report on Form 10-K along with Note 4 to our Consolidated Financial Statements for additional information about the IIS Acquisition. Note 8 to our Consolidated Financial Statements contains information about the completion of the Senior Notes Offerings and the repurchase of the Junior Subordinated Debt in 2011. Business Strategy Our goal is to leverage the competitive strengths of our organization and capital structure to generate stable long term returns on capital in excess of 15%. We seek to accomplish this by becoming a premier global preferred provider of customized reinsurance products and services to regional and specialty insurance companies. To achieve this goal, we have adopted the following strategies: • • • Dedication to Predictable and Stable Operating Segments — we execute this strategy in two ways: (1) focusing on traditional, lower volatility insurance lines of business that are more predictable and thus produce more stable long-term operating results and which require less capital to achieve those goals; and (2) placing emphasis on working layer and pro rata reinsurance participations where data is more abundant and predictable; Targeted Customer Focus — we execute this strategy by developing signiﬁcant and long term reinsurance relationships with targeted regional and specialty insurance companies for which reinsurance plays a critical element of their capital structure and supporting the long term needs of these companies by providing differentiated reinsurance products as well as an array of support services; and Effıcient Operating Platform — recognizing the mature nature of the reinsurance market, we are focused on maintaining operating expense ratios within the top quartile of the industry. Efficiency is a critical component of maintaining a disciplined underwriting approach. To date despite achieving returns on capital generally in excess of our industry peers, we have not yet attained our targeted returns. Principally impacting our ability to achieve targeted returns in recent years has been a higher than targeted combined ratio, lower investment yields brought about by difficult investment conditions and a higher cost of capital as a result of the TRUPS Offering. We believe that we have measures within our control to make substantial progress toward attainment of those long-term targets in the coming 12 to 24 months. However, our future results, and our ability to generate our targeted return on capital, may be additionally impacted by risks and trends set forth in Item 1A, ‘‘Risk Factors’’, and elsewhere in this Annual Report on Form 10-K. Our Principal Operating Subsidiaries Maiden Bermuda is a registered Class 3B Bermuda insurance and reinsurance company that began operations in June 2007. Senior management and all of the staff of Maiden Bermuda are located in our Bermuda headquarters. 3 Maiden Holdings North America, Ltd. (‘‘Maiden NA’’) is our wholly owned intermediate U.S. holding company and is domiciled in the state of Delaware. Maiden NA issued the underlying securities associated with our TRUPS Offering and the Senior Notes Offerings. Maiden US, a wholly owned subsidiary of Maiden NA, is a licensed property and casualty insurance company domiciled in the state of Missouri. Maiden Specialty, a wholly owned subsidiary of Maiden US and an indirect wholly owned subsidiary of Maiden NA, underwrites primary insurance on a surplus lines basis. Maiden Re Insurance Services, LLC (‘‘Maiden Re’’), a wholly owned subsidiary of Maiden NA, is a limited liability company organized in the state of Delaware in January 2008. Maiden Re operates as a managing general agent and underwriter for Maiden US. Maiden Global, a wholly owned subsidiary, operates as a reinsurance services and holding company. Maiden Global is organized under the laws of England and Wales and formed in July 2010. Opel Händler VersicherungsService GmbH (‘‘OVS’’), previously known as GMAC VersicherungsService GmbH (‘‘Maiden VS’’), is organized under the laws of Germany, operates as an insurance producer in Germany and is an indirect subsidiary of Maiden Global. On September 1, 2011, in exchange for a 10% interest in Maiden VS, we entered into cooperation agreements with VDOH Wirtschaftsdienst GmbH (‘‘Opel Dealer Association’’) in Germany and the German auto manufacturer Opel. We also renamed Maiden VS to ‘‘Opel Händler VerisicherungsService GmbH’’ on that date as well. Maiden LF, a wholly owned subsidiary, is a life insurer organized under the laws of Sweden and writes credit life insurance on a primary basis in support of Maiden Global’s business development efforts. Our Operating Segments We operate through three business segments: (i) Diversiﬁed Reinsurance; (ii) AmTrust Quota Share Reinsurance; and (iii) ACAC Quota Share. Our Diversiﬁed Reinsurance segment consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located in the United States and Europe. This segment includes the book of assumed reinsurance business purchased in the GMAC Acquisition and the IIS Acquisition. The business associated with the GMAC Acquisition is underwritten by Maiden US and Maiden Specialty. The business associated with the IIS Acquisition is underwritten by Maiden Bermuda, which also underwrites business independent of the business associated with the IIS Acquisition, the AmTrust Quota Shares and ACAC Quota Share. Our AmTrust Quota Share Reinsurance segment consists of the business ceded to us pursuant to our Quota Share Reinsurance Agreement (the ‘‘Reinsurance Agreement’’) with AmTrust Financial Services, Inc. (‘‘AmTrust’’) and, commencing April 1, 2011, business ceded to us under a separate automatically renewing one-year 40% quota share agreement (the ‘‘European Hospital Liability Quota Share’’) with AmTrust subsidiaries AmTrust Europe Limited and AmTrust International Underwriters Limited to cover those entities medical liability business in Europe, substantially all of which is in Italy. On March 7, 2013, after receipt of approval from the Company’s and AmTrust’s Audit Committee, the to the Reinsurance Agreement, which provides for the Company and AmTrust executed an amendment extension of the term of the Reinsurance Agreement to July 1, 2016. The amendment further provides that, effective January 1, 2013, AII will receive a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission will remain 34.375%. Though this commission adjustment eliminates its variable feature, the Company anticipates operating for the foreseeable future at that commission rate. Lastly, with regards to the Specialty Program portion of Covered Business only, excluding workers’ compensation business included in the AmTrust’s Specialty Program segment from July 1, 2007 through December 31, 2012, AmTrust will be responsible for ultimate net loss otherwise recoverable from Maiden Bermuda to the extent that the loss ratio to Maiden Bermuda, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95%. Above and below the deﬁned corridor, the Company will 4 continue to reinsure losses at its proportional 40% share per the Reinsurance Agreement. The Company believes that these contract revisions will help to maintain the stability of the overall performance for the Reinsurance Agreement. Effective January 1, 2012, the quota share reinsurance contract with AmTrust Europe Limited and AmTrust International Underwriters Limited was amended, thereby increasing the maximum liability attaching to €10,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Furthermore, amendments were also made to the contract to expand the territorial scope to include new territories, speciﬁcally France. Our ACAC Quota Share segment consists of the business ceded to us pursuant to our agreement with American Capital Acquisition Corp. (‘‘ACAC’’) which, through its affiliates, cedes approximately 25% of its business to us pursuant to a quota share reinsurance agreement. Financial data relating to our three segments is included in Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and in Note 3 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. The net premiums written and earned in each segment for the years ended December 31, 2012, 2011 and 2010 were as follows: For the Year Ended December 31, Diversiﬁed Reinsurance . . . . . . . . . . . AmTrust Quota Share Reinsurance . . . ACAC Quota Share . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . For the Year Ended December 31, Diversiﬁed Reinsurance . . . . . . . . . . . AmTrust Quota Share Reinsurance . . . ACAC Quota Share . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . 2012 Net Premiums Written ($ in Millions) $ 765.3 840.3 295.7 $1,901.3 2012 Net Premiums Earned ($ in Millions) $ 795.3 727.8 280.7 $1,803.8 % of Total 2011 Net Premiums Written ($ in Millions) % of Total 2010 Net Premiums Written ($ in Millions) 40.3% $ 798.0 669.3 44.2% 256.2 15.5% 100.0% $1,723.5 46.3% $ 554.1 468.0 38.8% 205.7 14.9% 100.0% $1,227.8 % of Total 2011 Net Premiums Earned ($ in Millions) % of Total 2010 Net Premiums Earned ($ in Millions) 44.1% $ 748.4 558.2 40.3% 245.8 15.6% 100.0% $1,552.4 48.3% $ 601.2 445.1 35.9% 123.5 15.8% 100.0% $1,169.8 % of Total 45.1% 38.1% 16.8% 100.0% % of Total 51.5% 38.0% 10.5% 100.0% A substantial majority of our premium written is generated by proportional reinsurance contracts, which are described in the General section of the Diversiﬁed Reinsurance segment below. For the years ended December 31, 2012, 2011 and 2010, 82.0%, 80.7% and 79.6%, respectively, of our consolidated gross premiums written is derived from proportional reinsurance contracts. This signiﬁcant concentration of proportional reinsurance, combined with our focus on lines of business which are inherently less volatile, results in a less capital intensive business which enables the Company to target higher returns on equity for its shareholders. Maiden US non-renewed certain proportional reinsurance contracts during the latter part of 2012 which may reduce the percentage of proportional reinsurance written prospectively. Financial data relating to geographic areas in which we operate and principal products may be found in Note 3 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. 5 Diversiﬁed Reinsurance General The Diversiﬁed Reinsurance segment of our reinsurance business consists of a varied portfolio of property and casualty and accident and health reinsurance business focusing on regional and specialty property and casualty insurance companies located in the United States and internationally. This business is primarily written by Maiden US. On November 30, 2010, the business associated with the IIS Acquisition, which is primarily located in Europe and the Americas, became part of this segment and is underwritten by Maiden Bermuda, with the exception of certain credit life policies written by Maiden LF, which are not material to the overall results of the segment. The Diversiﬁed Reinsurance segment also includes the net premiums written of Maiden Specialty, which are not material to the overall results of the segment. The reinsurance written by Maiden US is primarily written through treaties with other insurers on a quota share or excess of loss basis, as well as on a facultative basis, all of which are marketed primarily through third-party intermediaries and also on a direct basis. Maiden Bermuda also provides quota share reinsurance support to Maiden US and Maiden LF. In a proportional reinsurance arrangement (also known as pro rata reinsurance, quota share reinsurance or participating reinsurance), the reinsurer shares a proportional part of the original premiums of the reinsured. In return, the reinsurer assumes a proportional share of the losses incurred by the cedant. The reinsurer pays the ceding company a commission, which is generally based on the ceding company’s cost of acquiring the business being reinsured (including commissions, premium taxes, and miscellaneous administrative expenses) and may also include a proﬁt sharing arrangement. Under proportional reinsurance contracts, ceding commission is often adjustable based upon loss experience which potentially reduces earnings volatility under such arrangements. assessments Non-proportional (or excess of loss) reinsurance indemniﬁes the reinsured against all or a speciﬁed portion of losses on underlying insurance policies in excess of a speciﬁed amount, which is called a level, retention or attachment point. Non-proportional business is written in layers and a reinsurer or group of reinsurers accepts a band of coverage up to a speciﬁed amount. The total coverage purchased by the cedant is referred to as a program and is typically placed with predetermined reinsurers in pre-negotiated layers. Any liability exceeding the upper limit of the program reverts to the ceding company. Facultative reinsurance (proportional or non-proportional) is the reinsurance of individual risks. The reinsurer separately rates and underwrites each risk rather than assuming all or a portion of a class of risks as in the case of treaty reinsurance. A combination of general market and competitive conditions, along with their underlying ﬁnancial performance and capital levels including those considered by rating agencies and regulators, often inﬂuence reinsurance purchasing decisions of individual ceding companies. Historically, Maiden US has written greater amounts of quota share business than excess of loss business reﬂecting the needs of its clients. For the years ended December 31, 2012, 2011 and 2010, 52.4%, 53.6% and 52.9% of Maiden US’ gross premiums written was written on a quota share basis, respectively. Maiden US non-renewed certain proportional reinsurance contracts during the latter part of 2012 which may reduce the percentage of proportional reinsurance written prospectively. Maiden US began operations in 1983 through Maiden Re (previously GMAC RE LLC or ‘‘GMAC RE’’). Since its inception, the business has focused on developing a portfolio of assumed reinsurance with an emphasis on relatively predictable reinsurance with low limits of participation on both a treaty and facultative basis. By design, the underwriting portfolio was developed to mitigate volatility and generate stable operating performance. Our underwriting strategy has de-emphasized property catastrophe reinsurance and participations in more volatile casualty lines such as D&O and professional the underwriting infrastructure and capabilities were expanded to include an accident and health reinsurance portfolio, a specialty oriented property and casualty reinsurance and property excess and surplus lines insurance business and, the most signiﬁcant portfolio, a regional and specialty oriented property and casualty treaty reinsurance business. liability. Over its years in operation, 6 We employ sophisticated risk management, disciplined actuarially based pricing and strong technical underwriting in developing and maintaining this portfolio. We use both proprietary and vendor developed technology systems to administer and manage the portfolio. The business has been carefully developed under the active management of multi-functional underwriting teams with performance accountability. The entire related infrastructure of Maiden Re was acquired in the GMAC Acquisition and added to existing capabilities along with over 80 active client relationships. We are using this acquired infrastructure to continue to expand and develop the North American underwriting portfolio. For certain clients, Maiden Re provides enhanced security in the form of an internally developed dedicated trust agreement for the reinsurance balances payable to that client. We believe this reinsurance is both attractive to new clients and security provides us with a sustainable competitive advantage that improves retention of existing ones. The trust accounts are funded on an individual client basis with cash and other ﬁxed maturity securities. We can actively manage the cash and investments in the accounts and any interest earned is ours and does not remain in the trust accounts. The balances are adjusted quarterly to correspond to the liabilities owed to the client, including individually computed Incurred But Not Reported (‘‘IBNR’’) reserves. The clients can withdraw assets from the trusts under contractually limited circumstances. As of December 31, 2012, we had cash and ﬁxed maturity securities totaling $855.8 million in these trusts, which is part of to our Consolidated Financial Statements. the $2.2 billion restricted assets disclosed in Note 5(e) The business associated with the IIS Acquisition is written through treaties with other insurers on a quota share basis, which (as previously noted) are underwritten by Maiden Bermuda, with the exception of business written through Maiden LF which is underwritten on a primary basis. All of this business is marketed primarily through Maiden Global’s business development teams who partner with automobile manufacturers and local primary insurers to design and implement point of sale insurance programs which generate revenue for the auto manufacturer and insurance premiums for the primary insurer. Typically the primary insurer agrees to reinsure an agreed upon percentage of the underlying business to Maiden Bermuda as part of the overall arrangement. Maiden Bermuda is generally not obligated to underwrite the OEM’s programs Maiden Global designs. There are transactions where Maiden Global only collects a fee for designing and facilitating the sale of insurance programs. Our fee income is primarily generated by OVS (previously known as Maiden VS) in Germany and Austria through its point of sale producers in select OEM’s dealerships, with other smaller fee income programs in place globally. We seek to expand these fee generating arrangements through the Maiden Global business development teams contacts with automobile manufacturers globally. As noted on September 1, 2011, in exchange for a 10% interest in Maiden VS, we entered into cooperation agreements with the Opel Dealer Association in Germany and the German auto manufacturer Opel. 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 Maiden via OVS, respectively. For the years ended December 31, 2012 and December 31, 2011 and for the period from November 30, 2010 to December 31, 2010, we earned gross fee income of $12.9 million, $12.6 million and $0, respectively. Please refer to Note 3 to our Consolidated Financial Statements for further information regarding the accounting treatment of these fees. As of December 31, 2010, there were ﬁfteen reinsurance programs that were part of the business associated with the IIS Acquisition. During 2011, these programs were novated from GMAC International Insurance Company, Ltd. (‘‘GMAC IICL’’) to Maiden Bermuda and one program was commuted. The remaining program will be novated in 2013. thirteen of 7 The net premiums written associated with the IIS Acquisition were written in the following countries: For the Year Ended December 31, 2012 For the Year Ended December 31, 2011 For the Period from November 30 to December 31, 2010 Net Premiums Written ($ in Millions) $ 45.9 11.9 8.2 7.4 7.2 7.0 17.0 $104.6 % of Total Net Premiums Written ($ in Millions) 43.9% $ 53.4 4.2 11.4% 8.5 7.9% 5.5 7.1% 2.3 6.8% 6.4 6.7% 25.5 16.2% 100.0% $105.8 % of Total 50.5% 3.9% 8.0% 5.2% 2.2% 6.0% 24.2% 100.0% Net Premiums Written ($ in Millions) $10.6 0.6 6.4 1.9 0.4 2.2 7.5 $29.6 % of Total 35.8% 2.2% 21.6% 6.4% 1.3% 7.4% 25.3% 100.0% Germany . . . . . . . . . . . . . . . . . . . . . UK . . . . . . . . . . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . . . . . . . . . Mexico . . . . . . . . . . . . . . . . . . . . . . Colombia . . . . . . . . . . . . . . . . . . . . . Chile . . . . . . . . . . . . . . . . . . . . . . . . All other . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . The breakdown of this business by line of business is as follows: For the Year Ended December 31, 2012 For the Year Ended December 31, 2011 For the Period from November 30 to December 31, 2010 Net Premiums Written ($ in Millions) $ 72.8 31.8 $104.6 % of Total Net Premiums Written ($ in Millions) 69.6% $ 72.1 33.7 30.4% 100.0% $105.8 % of Total 68.1% 31.9% 100.0% Net Premiums Written ($ in Millions) $18.5 11.1 $29.6 % of Total 62.5% 37.5% 100.0% Personal Auto . . . . . . . . . . . . . . . . . . Credit Life . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . The distribution of the premiums written by both country and by line of business for the period from November 30 to December 31, 2010 is not necessarily reﬂective of these respective distributions on a full calendar year basis. On a geographic distribution basis, Germany historically constitutes a greater proportion of the overall premiums written, typically over 40%. On a line of business basis, Personal Auto historically constitutes a greater proportion of the overall premiums written, typically 70%. However, future distributions of premium by country and by line of business may vary from historical experience. Strategy Maiden Bermuda and Maiden US are specialty reinsurers with an efficient operating platform that target lines of business and types of contracts that are more predictable than the market as a whole, allowing stability of earnings over time. Maiden Specialty primarily provides specialty property coverage written on a surplus lines basis, but as noted, we expect to substantially reduce our net exposure to this business in 2013. Most business is written as reinsurance, that is, insurance of other insurance companies. The primary focus is regional and specialty customers who rely on reinsurance for capital support and/or to reduce their risk. The majority of our customers are regional or super-regional insurance companies or specialty insurers. With these customers, we believe it is possible to develop long term relationships which not only survive the insurance market cycles, but provide beneﬁts to both reinsurer and customer during turbulent times. In our Diversiﬁed Reinsurance segment, we reinsure property and casualty lines of business, but de-emphasize lines of business such as professional liability, which we consider more volatile, and we do not offer traditional catastrophe reinsurance on a stand-alone basis. We occasionally provide limited catastrophe coverage to customers that purchase other reinsurance from us. We are primarily a lead reinsurer, meaning that we develop our own terms rather than accepting a small share of another reinsurer’s program in a subscription market. We try to be the primary, if not sole, reinsurer for our customers. On business written as part of the IIS Acquisition, Maiden Bermuda is the only reinsurer on these contracts. Our handling of this business considers the economics of the individual customer and 8 therefore is less susceptible to large increases and decreases following market cycles. We are able to attract preferred customers because we offer a secure product and an emphasis on client service. By maintaining signiﬁcant relationships with customers, we are able to develop strong economies of scale and maintain highly competitive operating efficiencies, a critical element of our business strategy. We offer reinsurance on both a quota share basis and excess of loss basis. We believe that our policy of providing our customers security for our trusts gives us a competitive advantage. In the current economic climate, we also believe that reinsurance brokers and insurers, as well as rating agencies, are scrutinizing the credit-worthiness of reinsurers more closely than in the recent past and recognize that our collateral trust product offers a high level of security. We also utilize a partnership concept developed over Maiden Re’s twenty-nine year operating history to develop long-term customer relationships. This concept entails the offer to our customers of our expertise in underwriting, claims, actuarial, marketing and accounting, through tailored services which support their businesses and goals. reinsurance obligations through collateral Within the primary excess property business underwritten by Maiden Specialty, an experienced and sophisticated team underwrites complex property business on an excess and layered basis as a surplus lines insurer. To reduce the exposure to natural catastrophes that some of these policies in this segment may contain, we purchase catastrophe reinsurance to limit our maximum exposure to any one event. We also purchase other reinsurance to limit the impact of individual large losses in this segment. AmTrust Quota Share Reinsurance General AmTrust is our largest customer and is a multinational specialty property and casualty insurance holding company with operations in the United States, Europe and Bermuda. AmTrust’s principal operating subsidiaries are rated ‘‘A’’ (Excellent) with a stable outlook by A.M. Best, which rating is the third highest of 16 rating levels. AmTrust has three business segments: • • • Small commercial business insurance, which includes workers’ compensation, commercial package and other commercial lines produced by retail agents and brokers in the U.S.; Specialty risk and extended warranty coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the U.S., United Kingdom and certain other European countries; and Specialty program property and casualty insurance for homogeneous, narrowly deﬁned classes of insured’s, requiring an in-depth knowledge of the insured’s industry segment. Reinsurance Agreement Under our Reinsurance Agreement with AmTrust’s Bermuda subsidiary, AmTrust International Insurance, Ltd. (‘‘AII’’), effective July 1, 2007, we reinsure 40% of AmTrust’s written premium (net of commissions, in the case of AmTrust’s U.K. subsidiary), net of reinsurance with unaffiliated reinsurers, on AmTrust’s existing lines of business on the effective date. In addition, we have the option to reinsure future lines of business added by AmTrust, and we have exercised that option from time to time. reinsurance Effective April 1, 2011, the Company entered into a series of contract modiﬁcations with AmTrust including the ceding regarding the reinsurance coverage it provides under the Reinsurance Agreement, commission arrangements contained within that contract. These changes include: the (1) extension of Reinsurance 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 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, either party is entitled to terminate on thirty days’ notice or less upon the occurrence of certain early termination events, which include a default in to 30.0% for the period April 1 to December 31, 2011; and (3) subsequent 9 payment, insolvency, change in control of AII or Maiden Bermuda, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Bermuda or the combined shareholders’ equity of AII and the AmTrust subsidiaries. On March 7, 2013, after receipt of approval from the Company’s and AmTrust’s Audit Committee, the Company and AmTrust executed an amendment to the Reinsurance Agreement, which provides for the extension of the term of the Reinsurance Agreement to July 1, 2016. The amendment further provides that, effective January 1, 2013, AII will receive a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission will remain 34.375%. Though this commission adjustment eliminates its variable feature, the Company anticipates operating for the foreseeable future at that commission rate. Lastly, with regards to the Specialty Program portion of Covered Business only, excluding workers’ compensation business included in the AmTrust’s Specialty Program segment from July 1, 2007 through December 31, 2012, AmTrust will be responsible for ultimate net loss otherwise recoverable from Maiden Bermuda to the extent that the loss ratio to Maiden Bermuda, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95%. Above and below the deﬁned corridor, the Company will continue to reinsure losses at its proportional 40% share per the Reinsurance Agreement. The Company believes that these contract revisions will help to maintain the stability of the overall performance for the Reinsurance Agreement. European Hospital Liability Quota Share On April 1, 2011, as amended on January 1, 2012, the Company entered into the European Hospital Liability Quota Share with AmTrust Europe Limited and AmTrust International Underwriters Limited to cover liability business in Europe, substantially all of which is in Italy. The European those entities’ medical Hospital Liability Quota Share has a term of one year and automatically renews for further one year terms thereafter unless either party notiﬁes the other of its election in writing not to renew not less than four months prior to the end of any such term. Effective January 1, 2012, the Company’s maximum limit of liability is €4 million, previously €2 million, and consistent with the original agreement, pays 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 the in-force and unearned premium as of April 1, 2011 which totaled $45.9 million. ACAC Quota Share General ACAC is our second largest customer and is an insurance holding company owned by the 2005 Michael Karfunkel Grantor Retained Annuity Trust (the ‘‘Trust’’), which in turn is controlled by Leah Karfunkel, wife of Michael Karfunkel (‘‘Karfunkel’’), individually, and AmTrust. ACAC, on March 1, 2010, acquired from GMAC Insurance Holdings, Inc. and Motors Insurance Corporation (‘‘Motors’’) (collectively, ‘‘GMAC’’), GMAC’s personal lines automobile business. Karfunkel is a Founding Shareholder of Maiden. In addition, Karfunkel is the chairman of the board of directors of both ACAC and AmTrust and Chief Executive Officer of ACAC. On March 1, 2010, Maiden Bermuda entered into the ACAC Quota Share. Effective on that date, we reinsure 25% of the net premiums of the GMAC automobile business acquired by ACAC. ACP Re Ltd., a Bermuda reinsurer which is a wholly owned indirect subsidiary of the Trust, and AmTrust, are also reinsurers of this business. The ACAC Quota Share provides that the reinsurers, severally, in accordance with their participation percentages, shall receive 50% of the net premium of the GMAC personal lines insurance companies and assume 50% of the related net losses. The ACAC Quota Share has an initial term of three years and renews automatically for successive three year terms unless terminated by written notice not less than nine months prior to the expiration of the current term. Neither party gave that notice prior to June 1, 2012. 10 Effective October 1, 2012, the ACAC Quota Share was amended to decrease the provisional ceding commission from 32.5% to 32.0% of ceded earned premium, net of inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a minimum of 30.0% (changed from 30.5%), if the loss ratio is 64.5% or greater. We believe that the terms, conditions and pricing of the ACAC Quota Share have been determined by arm’s length negotiations and reﬂect current market terms and conditions. Notwithstanding the foregoing, our participation in the ACAC Quota Share may be terminated by ACAC on 60 days written notice in the event the Company becomes insolvent, is placed into receivership, its ﬁnancial condition is impaired by 50% of the amount of its surplus at the inception of the ACAC Quota Share or latest anniversary, whichever is greater, is subject to a change of control, or ceases writing new and renewal business. ACAC also may terminate the agreement on nine months written notice following the effective date of the initial public offering or private placement of stock by ACAC or a subsidiary. Maiden Bermuda may terminate its participation in the ACAC Quota Share on 60 days written notice in the event ACAC is subject to a change of control, ceases writing new and renewal business, effects a reduction in their net retention without Maiden Bermuda’s consent or fails to remit premium as required by the terms of the ACAC Quota Share. Risk Management General Central to the reinsurance business is the assumption and management of risk. Our risk management discipline therefore focuses on both quantitative and qualitative elements as the means to achieve targeted shareholder returns through a balanced analysis and assessment of these elements. The quantitative aspect of our risk management practice focuses on understanding and controlling a broad array of risk parameters in order to achieve desired returns. Our business model further mitigates the risk inherent in our business by focusing on lines of business which are less volatile and thus require less capital to support the exposures generated by those lines of business. The qualitative aspect of our risk management practice focuses on identifying and assessing risks, and taking the necessary steps to reduce or mitigate risks, or those risks that could threaten the achievement of our business objectives. We believe that we have developed a strong risk management culture within Maiden through the establishment of various processes and controls which focus on our risk exposures. We are continually reviewing and enhancing these processes and developing additional processes that may be necessary to achieve our business strategies and objectives within our risk management practice. Speciﬁc risk management practices that have been or are being developed to meet our risk management goals include: • • • Tracking portfolio volatility over time; Identifying risk mitigation opportunities and implementing them as appropriate; Understanding the capital required to support the underwriting portfolio and individual contracts; • Monitoring and managing exposure by line of business and geographic concentration; • Monitoring and limiting catastrophe aggregates and concentrations; • Monitoring and managing operational risks across the organization; and • Identifying, monitoring and managing emerging risks as they develop. Our Risk Management Oversight Committee, which consists of members of the Company’s executive management, focuses primarily on identifying correlations among our primary categories of risk, developing metrics to assess our overall risk appetite, establish appropriate risk parameters and tolerances, performing an annual risk assessment and continually reviewing factors that may impact our organizational risk. This risk governance structure is complemented by our internal audit department, which assesses the adequacy and effectiveness of our internal control systems and coordinates risk-based audits and compliance reviews and other speciﬁc initiatives to evaluate and address risk within targeted areas of our business. Our Enterprise Risk Management (‘‘ERM’’) is dynamic, with periodic updates being made to reﬂect organizational processes, as well as staying current with changes within our industry and the global economic environment. 11 Our management’s internal ERM efforts are overseen by the Audit Committee of the Board of Directors. This Committee, comprised solely of independent directors, assesses whether management is addressing risk issues in a timely and appropriate manner. Internal controls and ERM can provide a reasonable but not absolute assurance that our control objectives will be met. The possibility of material ﬁnancial loss remains in spite of our ERM efforts. Underwriting Risk Management Internal underwriting controls are established by our underwriting executives who are the Chief Underwriting Officer of Maiden Bermuda and the President of Maiden US, working in close coordination with our Chief Executive Officer. Underwriting authority is delegated to the managers in each business segment and to underwriters in accordance with prudent practice and an understanding of each underwriter’s capabilities. Our policy is to grant each underwriting team a speciﬁed limit, consistent with our operating guidelines. Our underwriters understand our return on equity guidelines. Our targeted performance goals and guidelines are regularly reviewed by management to reﬂect changes in market conditions, interest rates, capital requirements and market-expected returns. We have a disciplined approach to underwriting and risk management that relies heavily upon the collective underwriting expertise of our management and staff. This expertise is in turn guided by the following underwriting principles: • • • we will underwrite and accept only those risks we know and understand; we will perform our own independent pricing or risk review on all risks we accept; and we will accept only those risks that are expected to earn a risk-adjusted return on capital commensurate with the risk they present. Before we review any program proposal, we consider the appropriateness of the client, including the quality of its management, its ﬁnancial stability and its risk management strategy. In addition, we require each program to include signiﬁcant information on the nature of the perils to be included and detailed exposure and loss information, including rate changes and changes in underwriting and claims handling guidelines over time. We often conduct an on-site audit of the client’s operations prior to quoting. If a program meets our underwriting criteria, we then develop a proposal which contemplates the prospective client’s needs, that account’s risk/reward proﬁle, as well as our corporate risk objectives. We have fully integrated our internal claims, underwriting and pricing actuarial staff into the underwriting and decision making process. We use in-depth actuarial, claims and exposure analyses to evaluate contracts prior to quoting. We underwrite and accept property and casualty reinsurance business, accident and health reinsurance business and certain specialty property insurance business. In general, we seek to underwrite reinsurance business that historically is lower in volatility and more predictable than other classes of reinsurance business such as catastrophe reinsurance, which we generally seek to avoid. As part of our risk management process, we seek to identify those casualty and specialty exposures that are most likely to be simultaneously inﬂuenced by signiﬁcant events. These exposures are then jointly tracked to ensure that we do not develop an excessive accumulation of exposure to that particular type of event. In addition to the above technical and analytical practices, our underwriters use a variety of means, including speciﬁc contract terms, to manage our exposure to loss. These include occurrence limits, adjustable ceding commissions and premiums, aggregate limits, reinstatement provisions and loss sensitive features. Additionally, our underwriters use appropriate exclusions, terms and conditions to further eliminate particular risks or exposures that our underwriting team deems to be outside of the intent of the coverage we are willing to offer. In limited cases, the risks assumed by us are partially reinsured with other third party reinsurers. Reinsurance ceded varies by segment and line of business based on a number of factors, including market conditions. The beneﬁts of ceding risks include reducing exposure on individual risks and/or protecting against catastrophic risks. Reinsurance ceded does not legally discharge us from our liabilities to the original policyholder in respect of the risk being reinsured. See Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and Note 9 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. 12 Catastrophe Risk Management While we generally avoid catastrophe exposed reinsurance risks, certain risks we reinsure are exposed to catastrophic loss events. As a general rule, we seek to limit our modeled one-in-250 year catastrophe exposure to any one event to not exceed our operating income. At December 31, 2012, our one-in-250 year catastrophe exposure to either a hurricane or earthquake event was approximately $53.3 million. To achieve our catastrophe risk management objectives, we utilize commercially available tools to quantify and monitor the various risks we accept. We have licensed catastrophe modeling software from one of the principal modeling ﬁrms, Applied Insurance Research (‘‘AIR’’). These software tools use exposure data provided by our insured’s and ceding company clients to simulate catastrophic losses. We take an active role in the evaluation of these commercial catastrophe models, providing feedback to AIR to improve the efficiencies and accuracy of their models. We use modeling not just for the underwriting of individual transactions but also to optimize the total return and risk of our underwriting portfolio. We have high standards for the quality and levels of detailed exposure data provided by our clients and have an expressed preference for the most detailed location information available, including data at the zip code or postal code level or ﬁner. Data provided at more summary levels, such as counties, is conservatively modeled. The primary business underwritten by Maiden Specialty uses exposure information by location which is geo-coded. Data output from the software described above is incorporated in our proprietary pricing models. Our proprietary systems include those for modeling risks associated with property catastrophe, property and workers’ compensation business, various casualty and specialty pricing models, as well as our proprietary portfolio risk management model. These systems allow us to monitor our pricing and risk on a contract by contract basis in each of our segments and business lines. Reinsurance Including Retrocessions We use reinsurance and retrocessional agreements to a limited extent to mitigate volatility and to reduce our exposure on certain specialty reinsurance risks and to mitigate the effect of major catastrophic events. These agreements provide for reduction of property risk losses, casualty occurrence losses and catastrophe occurrence losses on speciﬁc treaties. We remain liable to our cedants to the extent that the retrocessionaires do not meet their obligations under retrocessional agreements, and these retrocessions are subject to credit risk in all cases and to aggregate loss limits in certain cases. We maintain a credit risk review process that identiﬁes authorized acceptable reinsurers and retrocessionaires and have no impaired balances. At December 31, 2012, we had approximately $110.9 million of reinsurance recoverable under such agreements, of which $79.7 million or 71.9% of this recoverable relate to reinsurance claims from Superstorm Sandy. Competition The reinsurance industry is mature and highly competitive. Reinsurance companies compete on the basis of many factors, including premium rates, general reputation and perceived ﬁnancial strength, the terms and conditions of the products offered, ratings assigned by independent rating agencies, speed of claims payments, reputation and experience in risks underwritten, capacity and coverages offered and various other factors. These factors operate at the individual market participant level and generally in the aggregate across the reinsurance industry. In addition, underlying economic conditions and variations in the reinsurance buying practices of ceding companies, by participant and in the aggregate, contribute to cyclical movements in rates, terms and conditions and may impact industry aggregate results and subsequently the level of completion in the reinsurance industry. We compete with major U.S. and non-U.S. reinsurers, including other Bermuda-based reinsurers, on an international and regional basis. In our Diversiﬁed Reinsurance segment, we compete with reinsurers that provide property and casualty-based lines of reinsurance such as: Swiss Reinsurance Company Ltd., Munich Inc., General Reinsurance Corporation, PartnerRe Ltd., Hannover Re Group, Reinsurance America, QBE Insurance Group, Transatlantic Holdings, Inc., Endurance Specialty Holdings, Ltd., Scor Reinsurance Company, Platinum Underwriters Holdings, Ltd. and The TOA Reinsurance Company of America, W.R. Berkley Corporation and Everest Re Group, Ltd. Many of these entities have signiﬁcantly larger amounts of capital, higher ratings from rating agencies and more employees than Maiden Holdings and its subsidiaries; in addition, these entities have established 13 long-term and continuing business relationships throughout the industry, which can be signiﬁcant competitive advantages. However, we believe the enhanced security that we offer our clients through collateral trusts, our niche specialist orientation, our operating efficiency and our careful relationship management capabilities help offset these advantages and allow us to effectively compete for proﬁtable business. In addition, risk-linked securities and derivative and other non-traditional risk transfer mechanisms and including entities other than insurance and vehicles are being developed and offered by other parties, reinsurance companies. The availability of these non-traditional products could reduce the demand for traditional insurance and reinsurance. A number of new, proposed or potential industry or legislative developments could further increase competition in our industry. New competition from these developments may result in fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention and less favorable policy terms and conditions, which could have a material adverse impact on our growth and proﬁtability. Natural and man-made catastrophes occur each year that affect reinsurance industry results. In each of the last three years the insurance and reinsurance industry has 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, we only experienced modest losses from the 2010 and 2011 global catastrophe events. Although the combined ultimate impact of recent catastrophe activity, in particular Superstorm Sandy, and the ﬁxed income investment environment remains unclear and is currently more uncertain in light of reinsurance industry performance, broad industry conditions brought about by these events remain supportive of improved pricing in the near term. To date however, industry ﬁnancial conditions have limited the amount of enhanced pricing the industry would normally experience during periods of increased catastrophe losses. More recently, January 1 reinsurance renewals for the industry appeared to show limited pricing improvement as a result of Sandy. Finally, the scope and tenure of any improved pricing environment remains 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. Depending on the ultimate impact of Superstorm Sandy combined with the continuing unfavorable investment environment on industry capital positions and proﬁtability, a signiﬁcant positive effect on competition and pricing is possible. We believe that we are well positioned to take advantage of market conditions should the pricing environment become more favorable. Our Financial Strength Ratings Ratings are an important factor in establishing the competitive position of insurance and reinsurance companies and are important to our ability to market and sell our products. We believe that the primary users of such ratings include brokers, ceding companies and investors. Insurance ratings are also used by insurance and reinsurance intermediaries as an important means of assessing the ﬁnancial strength and quality of insurers and reinsurers. Periodically, rating agencies evaluate us to conﬁrm that we continue to meet their criteria for the ratings assigned to us by them. A.M. Best and S&P have each developed a rating system to provide an opinion of an insurer’s or reinsurer’s ﬁnancial strength and ability to meet ongoing obligations to its policyholders and not an opinion on an insurer’s or reinsurer’s overall capacity and willingness to meet its ﬁnancial commitments as they become due. Each rating reﬂects that rating agency’s independent opinion of the capitalization, management and sponsorship of the entity to which it relates, and is neither an evaluation directed to investors in our common shares nor a recommendation to buy, sell or hold our common shares. A.M. Best maintains a letter scale rating system ranging from ‘‘A++’’ (Superior) to ‘‘F’’ (In Liquidation). S&P maintains a letter scale rating system ranging from ‘‘AAA’’ (Extremely Strong) to ‘‘R’’ (Under Regulatory Supervision). 14 Our subsidiaries, Maiden Bermuda, Maiden US and Maiden Specialty, each currently has a ﬁnancial strength rating of ‘‘A-’’ (Excellent, the fourth highest out of sixteen rating levels) with a stable outlook from A.M. Best, and ‘‘BBB+’’ (Good, the eighth highest out of twenty-two rating levels) with a stable outlook from S&P. We can offer no assurances that our ratings will remain at their current levels, or that our security will be accepted by brokers and our insureds and reinsureds. A ratings downgrade or the potential for such a downgrade, or failure to obtain a necessary rating, could adversely affect both our relationships with clients, brokers and other distributors of our existing products and services and new sales of our products and services. We believe the collateralization of reinsurance obligations provides additional ﬁnancial protection for our clients and a signiﬁcant point of differentiation from its competitors, allowing us to compete with higher rated reinsurers. Distribution of Our Reinsurance Products We market our Diversiﬁed Reinsurance segment in the United States and Bermuda primarily through third-party intermediaries, as well as directly through our own marketing team. Our direct marketing activities are generally focused on insurers with a demonstrated preference and propensity to utilize direct distribution reinsurers. We believe this combination affords us ﬂexibility and efficiency. In the years ended December 31, 2012, 2011 and 2010, the sources of gross premiums written by our Diversiﬁed Reinsurance segment were as follows: % of Gross Premiums Written for the Year Ended December 31, Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 2012 68.8% 31.2% 100.0% 2011 66.1% 33.9% 100.0% 2010 73.0% 27.0% 100.0% In the years ended December 31, 2012, 2011 and 2010, our top three brokers represented approximately 34.1%, 39.4% and 41.1%, respectively, of gross premiums written by our Diversiﬁed Reinsurance segment. A further breakdown of the gross premiums written by our Diversiﬁed segment by broker for December 31, 2012, 2011 and 2010, respectively, are provided in the table below. % of Gross Premiums Written for the Year Ended December 31, Broker Marsh Inc. (including Guy Carpenter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aon Benﬁeld Group, Ltd. Beach & Associates Ltd. . . . . . . . . . . . . . . . . . . . . . Other Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Diversiﬁed . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 2010 16.5% 9.3% 8.3% 34.7% 68.8% 31.2% 100.0% 18.1% 11.9% 9.4% 26.7% 66.1% 33.9% 100.0% 22.7% 12.3% 6.1% 31.9% 73.0% 27.0% 100.0% Reserve for Loss and Loss Adjustment Expenses General We are required by applicable insurance laws and regulations in Bermuda, the United States, Sweden and accounting principles generally accepted in the United States (‘‘U.S. GAAP’’) to establish loss reserves to cover our estimated liability for the payment of all loss and loss adjustment expenses incurred with respect to premiums earned on the policies and treaties that we write. These reserves are balance sheet liabilities representing estimates of loss and loss adjustment expenses which ultimately we are required to pay for insured or reinsured claims that have occurred as of or before the balance sheet date. It is our policy to establish these losses and loss expense reserves using prudent actuarial methods after reviewing all information known to us at the date they are recorded. These amounts include case reserves, additional case reserves (‘‘ACRs’’) and provisions for IBNR reserves. Case reserves are established for losses that have been reported to us, and not yet paid. ACRs are 15 established for particular circumstances where, on the basis of individual loss reports, we estimate that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. Our claims department evaluates all signiﬁcant losses reported to us and if appropriate will include a provision for additional case reserves if we feel the ceding company’s estimate of the claim is not adequate. IBNR reserves represent the estimated cost of losses that have occurred but have not been reported to us and include a provision for additional development on case reserves. We establish case reserves based on information from the ceding company, reinsurance intermediaries, and when appropriate, consultations with independent legal counsel. The IBNR reserves are established by management based on reported losses and loss expenses and actuarially determined estimates of ultimate loss and loss adjustment expenses. We use a variety of standard actuarial methods to estimate ultimate expected loss and loss adjustment expenses applying appropriate actuarial judgment in the determination of ultimate losses. The majority of business is reserved individually by cedant with the remainder reserved in homogeneous groupings. Ultimate losses across the reserve segments are converted to IBNR reserves by subtracting inception to date paid losses case reserves and ACRs from those amounts. The accumulation of case and IBNR reserves across the reserve segments results in indicated reserves which are the basis for the carried reserves for ﬁnancial statements. Ultimate losses are also used to estimate premium and commission accruals for accounts with adjustable features. Property catastrophe reserves are estimated by event and are revisited monthly. Estimated ultimate catastrophe losses may be based on output from catastrophe models early on and then on ceding company estimates and the reserving methods above. Loss reserves do not represent an exact calculation of liability; rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are reﬁned as experience develops and as claims are reported and resolved. Establishing an appropriate level of loss reserves is an inherently uncertain process. The uncertainties may be greater for reinsurers like us than for reinsurers with an established operating and claims history and a larger number of insurance and reinsurance transactions. In addition, the relatively long reporting periods between when a loss occurs and when it may be reported to our claims department for our casualty lines of business also increase the uncertainties of our reserve estimates in such lines. To assist us in establishing appropriate reserves for loss and loss adjustment expenses, we analyze a signiﬁcant amount of internal data and external insurance industry information with respect to the pricing environment and loss settlement patterns. In combination with our individual account pricing analyses and our internal loss settlement patterns, this industry information is used to guide our loss and loss expense estimates. These estimates are reviewed quarterly, at a high level of detail, and any adjustments are reﬂected in earnings in the periods in which they are determined. There is a signiﬁcant amount of estimation involved in determining ultimate losses and loss adjustment expenses. We believe that while our case reserves and IBNR reserves are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased, which represents unfavorable reserve development, and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced, which represents favorable reserve development. Loss Portfolio Transfer of the GMAC RE Loss Reserves and Ongoing Novation of Certain Related Reserves and Liabilities In connection with the GMAC Acquisition, Maiden Bermuda entered into a loss portfolio transfer agreement with Motors whereby it assumed the outstanding loss reserves, including a provision for IBNR reserves associated with the GMAC RE business acquired ($755.6 million at October 31, 2008). We received cash and U.S. government and U.S. government agency ﬁxed maturity investments equal to the amount of loss reserves. 16 The loss reserves assumed by Maiden Bermuda from Motors represented the estimate of the unpaid losses to be paid on all of the reinsurance contracts produced by GMAC RE from 1983 until October 31, 2008. Because the entire related infrastructure of GMAC RE, including the actuarial and claims procedures and personnel were acquired by us, the methodology for establishing the estimates for losses and loss expense have been consistently applied. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may be higher or lower than the total reserves recorded by us. A breakdown of the case and IBNR reserves assumed under the loss portfolio transfer as of October 31, 2008 by underwriting year is provided in the table below. Underwriting Year* 2000 & Prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1 to October 31, 2008 . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Reserves $ 27.3 10.4 20.1 15.0 16.5 27.8 59.4 60.2 48.3 $285.0 IBNR Reserves ($ in Millions) $ 20.7 10.8 28.3 28.3 32.6 51.5 93.0 112.0 93.4 $470.6 Total Reserves $ 48.0 21.2 48.4 43.3 49.1 79.3 152.4 172.2 141.7 $755.6 * Underwriting year comprises all policies written or renewed during the year and all losses relating to those same policies, whenever they may occur. These loss reserves are treated as retroactive reinsurance under U.S. GAAP. Accordingly, any subsequent change in the estimate of the subject losses since the date of transfer are amortized into the Company’s results of operations based upon the cumulative payment of actual claims in relation to the subject losses transferred. A breakdown of the remaining case and IBNR reserves assumed under the loss portfolio transfer as of December 31, 2012 was as follows: Underwriting Year* 2000 & Prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1 to October 31, 2008 . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Reserves $ 23.4 9.1 16.3 12.7 9.5 10.3 15.1 19.3 12.3 $128.0 IBNR Reserves ($ in Millions) $13.9 7.9 12.7 11.8 8.6 12.8 17.0 12.4 0.4 $97.5 Total Reserves $ 37.3 17.0 29.0 24.5 18.1 23.1 32.1 31.7 12.7 $225.5 * Underwriting year comprises all policies written or renewed during the year and all losses relating to those same policies, whenever they may occur. Under the terms of the GMAC Acquisition, we had the right for a transition period of twenty-four months, which expired on October 31, 2010, to have Motors front certain reinsurance business in cases where we do not have the necessary regulatory licenses or approvals. In 2009, Maiden US received all of the necessary regulatory licenses and approvals. Therefore reinsurance premiums underwritten by Maiden Re in the U.S. have been recorded both in Maiden US and pursuant to the terms of the quota share reinsurance 17 agreement between the companies, by Maiden Bermuda. This business is included in the Diversiﬁed Reinsurance segment and represents 86.2%, 84.8% and 91.6% of the gross written premium for this segment for the years ended December 31, 2012, 2011 and 2010, respectively. In June 2009, A.M. Best downgraded its rating of Motors to B++, which is an insufficient rating for many of our reinsurance clients. The impact of this downgrade is minimal as most of our clients have their liabilities collateralized in trusts. Nevertheless, for current clients we have offered the opportunity to novate all their policies with Motors underwritten by Maiden Re. As of December 31, 2012, approximately of $144.1 million of liabilities relating to the loss portfolio transfer have been novated to Maiden US. Loss Portfolio Transfer of the IIS Acquisition Loss Reserves and Ongoing Novation of Certain Related Reserves and Liabilities In connection with the IIS Acquisition, Maiden Bermuda entered into a Loss Portfolio Transfer Agreement and Quota Share Reinsurance (‘‘IIS Reinsurance Agreement’’) with GMAC IICL whereby it assumed the outstanding loss reserves, including a provision for IBNR reserves associated with the IIS business ($98.8 million at November 30, 2010). This does not include the $3.2 million of outstanding loss reserves, including a provision for IBNR reserves associated with the acquisition of Maiden LF. Pursuant to the terms of the purchase agreement, the substantial majority of the subject reinsurance contracts are collateralized by letters of credit or trust agreements. Until such time as those contracts were novated from GMAC IICL to Maiden Bermuda (which was required to be completed within twelve months of closing), the underlying assets were held by GMAC IICL subject to the provisions of the reinsurance agreement between GMAC IICL and Maiden Bermuda. However, all investment income produced by these assets is fully credited to Maiden Bermuda until novation. During 2011, thirteen of the ﬁfteen reinsurance programs that were part of the business associated with the IIS Acquisition were novated from GMAC IICL to Maiden Bermuda and one was commuted. The remaining program is expected to be novated in 2013. The underlying assets in support of the remaining collateral arrangements, which total $22.7 million, are recorded as Funds Withheld on the accompanying Consolidated Balance Sheet as of December 31, 2012. The loss reserves retroceded by GMAC IICL to Maiden Bermuda represented the estimate of the unpaid losses to be paid on all of the reinsurance contracts produced by GMAC IICL through November 30, 2010. Because the entire related infrastructure of GMAC IICL, including the claims procedures and personnel were acquired by us, the methodology for establishing the estimates for losses and loss expense have been consistently applied. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may be higher or lower than the total reserves recorded by us. A breakdown of the case and IBNR reserves assumed under the IIS Reinsurance Agreement as of November 30, 2010, by underwriting year is provided in the table below. Underwriting Year* 2000 & Prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1 to November 30, 2010 . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Reserves $17.8 2.0 1.6 2.8 2.7 3.4 4.3 5.3 7.5 9.1 12.8 $69.3 IBNR Reserves ($ in Millions) $ 0.9 — — 0.2 0.4 0.5 0.4 1.4 1.5 2.6 21.6 $29.5 Total Reserves $18.7 2.0 1.6 3.0 3.1 3.9 4.7 6.7 9.0 11.7 34.4 $98.8 * Underwriting year comprises all policies written or renewed during the year and all losses relating to those same policies, whenever they may occur. 18 These losses are treated as retroactive reinsurance under U.S. GAAP. Accordingly, any subsequent change in the estimate of the subject losses since the date of transfer are amortized into our results of operations based upon the cumulative payment of actual claims in relation to the subject losses transferred. A breakdown of the remaining case and IBNR reserves assumed under the loss portfolio transfer as of December 31, 2012 was as follows: Underwriting Year* 2000 & Prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1 to November 30, 2010 . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Reserves $16.5 1.4 1.2 2.6 2.8 2.5 2.8 4.9 5.0 2.9 4.6 $47.2 IBNR Reserves ($ in Millions) $ 0.3 0.1 0.1 (0.3) (0.6) (0.7) (0.6) (1.4) (1.2) (0.8) (0.6) $(5.7) Total Reserves $16.8 1.5 1.3 2.3 2.2 1.8 2.2 3.5 3.8 2.1 4.0 $41.5 * Underwriting year comprises all policies written or renewed during the year and all losses relating to those same policies, whenever they may occur. Pursuant to the IIS Reinsurance Agreement, Maiden Bermuda reinsures all of the existing reinsurance contracts written by GMAC IICL. Future new reinsurance contracts will be underwritten by Maiden Bermuda. According to the loss portfolio transfer provisions of the IIS Reinsurance Agreement, in addition to the loss reserves assumed by us described above, we also assumed unearned premium of approximately $19.5 million, net of acquisition expenses as of November 30, 2010. The reinsurance premiums from the IIS Acquisition and underwritten by Maiden Bermuda are included in the Diversiﬁed Reinsurance segment and represent 13.7% 13.3% and 5.3% of the net premiums written for this segment for the years ended December 31, 2012, 2011 and 2010, respectively. Change in Reserves The following tables (‘‘Analysis of Consolidated Net Loss Reserves Development’’) show the development of gross and net reserves for unpaid loss and loss adjustment expenses for our business for calendar years 2010 through 2012. The tables do not present accident or policy year development data. Each including IBNR reserves, table begins by showing the initial reported year-end gross and net reserves, recorded at the balance sheet date for each of the three years presented. The next section of the table shows the re-estimated amount of the initial reported net reserves for up to four subsequent years, based on experience at the end of each subsequent year. The re-estimated net liabilities reﬂect additional information, received from cedants or obtained through reviews of industry trends, regarding claims incurred prior to the end of the preceding ﬁnancial year. A (redundancy) or deﬁciency arises when the re-estimation of reserves is (less) or greater than its estimation at the preceding year-end. The cumulative redundancies (or deﬁciencies) reﬂect cumulative differences between the initial reported net reserves and the currently re-estimated net reserves. Annual changes in the estimates are reﬂected in the income statement for each year as the liabilities are re-estimated. The lower section of the table shows the portion of the initial year-end net reserves that was paid (claims paid) as of the end of subsequent years. This section of the table provides an indication of the portion of the re-estimated net liability that is settled and is unlikely to develop in the future. 19 Analysis of Consolidated Net Loss Reserves Development The following table presents additional information regarding the development of gross loss reserves. The table below is a reconciliation of the beginning and ending liability for unpaid loss and loss adjustment expenses for the years ended December 31, 2012, 2011 and 2010. For the Year Ended December 31, Gross unpaid loss and loss adjustment expenses reserves at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reinsurance recoverable at beginning of period . . . . . . . . . Net loss and loss adjustment expense reserves at beginning 2012 2011 ($ in Millions) 2010 $ 1,398.4 20.3 $1,226.8 6.7 $1,002.7 8.4 of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,378.1 1,220.1 994.3 Net incurred losses related to: Current year Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net paid losses related to: Current year Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired loss and loss expense reserve . . . . . . . . . . . . . . . . . . Effect of foreign exchange movement . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expense reserves at end of period . . Reinsurance recoverable at end of period . . . . . . . . . . . . . . . . Gross unpaid loss and loss adjustment expenses reserves 1,239.0 23.3 1,262.3 (485.0) (530.3) (1,015.3) — 4.3 1,629.4 110.9 1,028.9 14.2 1,043.1 (456.1) (423.9) (880.0) 0.4 (5.5) 1,378.1 20.3 788.0 (32.9) 755.1 (365.3) (266.0) (631.3) 102.0 — 1,220.1 6.7 at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,740.3 $1,398.4 $1,226.8 The Company amortized gains as a reduction of losses incurred of $9.1 million, $28.9 million and $25.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. The total favorable development relating to the loss portfolio transfers since the closing of the GMAC Acquisition and IIS Acquisition has been $75.7 million. Due to loss sensitive features of certain contracts, favorable (or unfavorable) loss reserve development does not necessarily result in additional (or reduced) underwriting income as ceding commission may be adjusted proportionally to the amount of loss development, pursuant to the terms of the individual contracts. 20 Analysis of Gross and Net Unpaid Losses and Loss Adjustment Expenses and Net Re-estimated Liability Development of Reserve for Loss and Loss Adjustment Expenses Cumulative Deﬁciency (Redundancy) Gross Losses For the Year Ended December 31, 2007 2008(1) 2009 2010(2) 2011 2012 ($ in Millions) Gross As Originally Estimated . . . . . . . . Liability Re-estimated as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . Cumulative deﬁciency $ 38.5 $897.7 $1,002.7 $1,226.8 $1,398.4 $1,740.3 $ 36.7 37.3 37.9 39.5 38.8 $886.3 869.8 848.6 842.6 $ 959.7 963.8 972.5 $1,232.7 1,224.1 $1,418.8 (redundancy) . . . . . . . . . . . . . . $ 0.3 $ (55.1) $ (30.2) $ (2.7) $ 20.4 Cumulative claims paid as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . $ 16.6 33.7 34.1 37.6 38.0 $303.2 402.4 542.2 665.0 $ 266.0 457.8 607.0 $ 452.7 746.1 $ 592.8 Liability Re-estimated as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . Cumulative deﬁciency (redundancy) on gross reserve . . . . . . . . . . . . Gross Loss and Loss Expense Cumulative Paid as a Percentage of Originally Estimated Liability One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . 95.4% 96.8% 98.5% 102.5% 100.9% 98.7% 96.9% 94.5% 93.9% 95.7% 96.1% 97.0% 100.5% 99.8 101.5% 0.9% (6.1)% (3.0)% (0.2)% 1.5% 43.1% 87.6% 88.6% 97.7% 98.8% 31.9% 44.8% 60.4% 74.1% 26.5% 45.7% 60.5% 36.9% 60.8% 42.4% 21 For the Year Ended December 31, 2007 2008(1) 2009 2010(2) 2011 2012 ($ in Millions) Losses Net of Reinsurance As Originally Estimated . . . . . . . . Liability Re-estimated as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . Cumulative deﬁciency $ 38.5 $897.7 $994.3 $1,220.1 $1,378.1 $1,629.4 $ 36.7 37.3 37.9 39.5 38.8 $886.3 869.8 852.9 842.6 $961.4 969.5 967.8 $1,234.3 1,229.6 $1,401.4 (redundancy) . . . . . . . . . . . . . . $ 0.3 $ (55.1) $ (26.5) $ 9.5 $ 23.3 Cumulative claims paid as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . $ 16.6 33.7 34.1 37.6 38.0 $303.2 402.4 542.2 665.0 $266.0 444.3 575.1 $ 423.9 682.9 $ 530.3 Liability Re-estimated as of: One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . Cumulative deﬁciency (redundancy) on net reserve . . . . . . . . . . . . . . Net Loss and Loss Expense Cumulative Paid as a Percentage of Originally Estimated Liability One Year later . . . . . . . . . . . . . . . . Two Years later . . . . . . . . . . . . . . . Three Years later . . . . . . . . . . . . . . Four Years later . . . . . . . . . . . . . . . Five Years later . . . . . . . . . . . . . . . 95.4% 96.8% 98.5% 102.5% 100.9% 98.7% 96.9% 95.0% 93.9% 96.7% 97.5% 97.3% 101.2% 100.8% 101.7% 0.9% (6.1)% (2.7)% 0.8% 1.7% 43.1% 87.6% 88.6% 97.7% 98.8% 33.8% 44.8% 60.4% 74.1% 26.7% 44.7% 57.8% 34.7% 56.0% 38.5% (1) Reserve for loss and loss adjustment expenses include the reserves for loss and loss adjustment expenses of $755.6 million, from the GMAC Acquisition, which we acquired in October 2008. (2) Reserve for loss and loss adjustment expenses include the reserves for loss and loss adjustment expenses of $98.8 million from the IIS Acquisition, which we acquired in November 2010. For additional information concerning our reserves, see Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Reserve for Losses and Loss Adjustment Expenses’’ for further information regarding the speciﬁc actuarial models we utilize and the uncertainties in establishing the reserve for loss and loss adjustment expenses. Our Employees As of February 25, 2013, we had a total of 214 full-time employees who are located in Bermuda, the United States, the United Kingdom, Germany, Austria, Russia, Netherlands, Uruguay and Australia. We may increase our staff over time commensurate with the expansion of operations. We believe that our employee relations are good. None of our employees are subject to collective bargaining agreements. 22 Regulatory Matters General The reinsurance and regulatory environment, in particular for offshore reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the United States and various states within the U.S.. In the past, there have been Congressional and other initiatives in the U.S. regarding increased supervision and regulation of the insurance industry. For example, in response to the tightening of supply in some insurance and reinsurance markets resulting from, among other things, the World Trade Center tragedy, the United States Terrorism Risk Insurance Act of 2002 (‘‘TRIA’’), the Terrorism Risk Insurance Extension Act of 2005 (the ‘‘TRIA Extension of 2005’’) and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the ‘‘TRIA Extension of 2007’’) were enacted to ensure the availability of insurance coverage for terrorist acts in the United States. This law establishes a federal assistance program through the end of 2014 to help the commercial property and casualty insurance industry cover claims related to future terrorism related losses and regulates the terms of insurance relating to terrorism coverage. TRIA, the TRIA Extensions of 2005 and 2007 have had little impact on our business because few of our reinsurance clients are purchasing this coverage. Recent US federal budget proposals have contained provisions dealing with both the taxation of premium cessions to foreign affiliates and a recommendation supporting the termination of TRIA. We do not believe that either of these initiatives will have a signiﬁcant impact on Maiden. We are in compliance with the recommended reinsurance cession limitation in the tax proposal. Given our focus on a diverse portfolio of regional and specialty clients and occurrence limitations contained within speciﬁc reinsurance contracts, we believe that exposure to the termination of TRIA would be limited. Bermuda Insurance Regulation The Insurance Act 1978 of Bermuda, as amended, and related regulations (together, the ‘‘Insurance Act’’), which regulates the insurance business of Bermuda registered insurers, provides that no person shall carry on any insurance business in or from within Bermuda unless that person has been registered under the Insurance Act by the Bermuda Monetary Authority (the ‘‘BMA’’). The BMA is responsible for the day-to-day is the group supervisor. Under the supervision of insurers and insurance groups in respect of which it Insurance Act, insurance business includes reinsurance business. The registration of an applicant as an insurer is subject to its complying with the terms of its registration and such other conditions as the BMA may impose from time to time. The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies and grants to the BMA powers to supervise, investigate and intervene in the affairs of insurance companies. The Insurance Act also imposes certain regulatory requirements on insurance groups where the BMA has determined that it should act as group supervisor. Certain signiﬁcant aspects of the Bermuda insurance regulatory framework are set forth below. Cancellation of Insurer’s Registration. An insurer’s registration may be canceled by the BMA on certain grounds speciﬁed in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or if, in the opinion of the BMA, the insurer has not been carrying on business in accordance with sound insurance principles. We believe that we are in compliance with applicable regulations under the Insurance Act. Principal Offıce and Principal Representative. An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. It is the duty of the principal there is a likelihood of the insurer for which the principal representative, upon reaching the view that representative acts becoming insolvent or that a reportable ‘‘event’’ has, to the principal representative’s knowledge, occurred or is believed to have occurred, to immediately notify the BMA and to make a report in writing to the BMA within 14 days of the prior notiﬁcation setting out all the particulars of the case that are available to the principal representative. Approved Loss Reserve Specialist. As a registered Class 3B insurer, Maiden Bermuda is required to appoint an individual approved by the BMA as a person qualiﬁed to assess the adequacy of insurance loss reserves as a loss reserve specialist. Maiden Bermuda is required to submit an opinion of its approved loss reserve specialist with its statutory ﬁnancial return in respect of its loss and loss expense provisions. 23 Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return. Maiden Bermuda must prepare annual statutory ﬁnancial statements as prescribed in the Insurance to its general business. The statutory ﬁnancial statements are distinct from the annual Act with respect U.S. GAAP ﬁnancial statements referred to below. Maiden Bermuda is also required to prepare and ﬁle with the BMA statutory ﬁnancial returns with respect to its general business. The statutory ﬁnancial return for a Class 3B insurer includes, among other things, a report of the approved independent auditor on the statutory the statutory ﬁnancial statement of such insurer, declaration of the statutory ratios, solvency certiﬁcates, ﬁnancial statements for the general business, the opinion of the loss reserve specialist, a schedule of reinsurance ceded and a statutory declaration in the matter of the insurance code of conduct as described below. Maiden Bermuda is also required to ﬁle audited U.S. GAAP annual ﬁnancial statements, which must be available to the public. In addition, Maiden Bermuda is required to ﬁle a capital and solvency return, which shall include the company’s Bermuda Solvency Capital Requirement (‘‘BSCR’’) model (described below), a schedule of ﬁxed income investments by rating categories, a schedule of net reserves for losses and loss expense provisions by line of business, a schedule of premiums written by line of business, schedules of risk management, a schedule of ﬁxed income securities, a schedule of commercial insurer’s solvency self assessment (‘‘CISSA’’), a schedule of catastrophe risk return, a schedule of loss triangles or reconciliation of net loss reserves and a schedule of eligible capital. Independent Approved Auditor. As a Class 3B insurer, Maiden Bermuda must appoint an approved independent auditor who will annually audit and report on the insurer’s ﬁnancial statements prepared under generally accepted accounting principles or international ﬁnancial reporting standards (‘‘U.S. GAAP ﬁnancial statements’’) and statutory ﬁnancial statements and the statutory ﬁnancial return of the insurer, all of which, in the case of Maiden Bermuda, are required to be ﬁled annually with the BMA. Minimum Liquidity Ratio. The Insurance Act requires all general business insurers to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, ﬁrst liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless speciﬁcally permitted by the BMA, investments in and do not automatically qualify as relevant assets, such as unquoted equity securities, advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not speciﬁcally deﬁned). Minimum Solvency Margin, Enhanced Capital Requirement and Restrictions on Dividends and Distributions. Under the Insurance Act, Maiden Bermuda must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than its prescribed minimum solvency margin (‘‘MSM’’) and its enhanced capital requirement (‘‘ECR’’). While not speciﬁcally referred to in the Insurance Act, the BMA has also established a target capital level (‘‘TCL’’) for each insurer subject to an enhanced capital requirement equal to 120% of its ECR. While such an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight. Fit and Proper Controllers. The BMA maintains supervision over the controllers of all registered insurers in Bermuda. A controller includes (i) the managing director of the registered insurer or its parent company; (ii) the chief executive of the registered insurer or of its parent company; (iii) a shareholder controller; and (iv) any person in accordance with whose directions or instructions the directors of the registered insurer or of its parent company are accustomed to act. 24 Notiﬁcation by Registered Person of Change of Controllers and Offıcers. All registered insurers are required to give written notice to the BMA of the fact that a person has become, or ceased to be, a controller or officer of the registered insurer within 45 days of becoming aware of such fact. An officer in relation to a registered insurer means a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, ﬁnance or investment matters. Notiﬁcation of Material Changes. All registered insurers are required to give notice to the BMA of their intention to effect a material change within the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes are material: (i) the transfer or acquisition of insurance business being part of a scheme falling under section 25 of the Insurance Act or section 99 of the Companies Act 1981 of Bermuda (the ‘‘Companies Act’’); (ii) the amalgamation with or acquisition of another ﬁrm; (iii) engaging in unrelated business that is retail business, (iv) the acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services and products to persons who are not affiliates of the insurer, (v) outsourcing all or substantially all of the company’s actuarial, risk management and internal audit functions, (vi) outsourcing all or a material part of an insurer’s underwriting activity, (vii) the transfer other than by way of reinsurance of all or substantially all of a line of business, and (viii) the expansion into a material new line of business. Code of Conduct. Maiden Bermuda is subject to the Insurance Code of Conduct (the ‘‘Code’’) which prescribes the duties and standards which must be complied with to ensure it implements sound corporate governance, risk management and internal controls. Every Bermuda insurer is now required to submit as part of its annual statutory return, a statutory declaration conﬁrming that the company is in compliance with the Code. Failure to comply with the requirements under the Code will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act. Such failure to comply with the requirements of the Code could result in the BMA exercising its powers of intervention (see BMA’s Powers of Intervention, Obtaining Information, Reports and Documents and Providing Information to other Regulatory Authorities below) and will be a factor in calculating the operational risk charge applicable in accordance with that insurer’s BSCR model or approved internal model. We believe that we are in compliance with the Code. Group Supervision. The BMA acts as group supervisor of the Maiden group of companies (the ‘‘Maiden Group’’) and has designated Maiden Bermuda to be the designated insurer. As group supervisor, the BMA will perform a number of supervisory functions including (i) coordinating the gathering and dissemination of information which is of importance for the supervisory task of other the insurance group; (ii) carrying out a supervisory review and assessment of competent authorities; (iii) carrying out an assessment of the insurance group’s compliance with the rules on solvency, risk concentration, intra-group transactions and good governance procedures; (iv) planning and coordinating, through regular meetings (to be held at least annually) with other competent authorities, supervisory activities in respect of the insurance group, both as a going concern and in emergency situations; (v) coordinating any enforcement action that may need to be taken against the insurance group or any of its members; and (vi) planning and coordinating meetings of colleges of supervisors in order to facilitate the carrying out of the functions described above. In carrying out its group supervisory functions, the BMA may make rules for (i) assessing the ﬁnancial situation and the solvency position of the insurance group and/or its members and (ii) regulating intra- group transactions, and regulatory reporting and disclosure. risk concentration, governance procedures, risk management Group Solvency and Group Supervision. The current insurance group supervision and insurance group solvency rules (together, ‘‘Group Rules’’) will apply to Maiden Bermuda and the Maiden Group so long as the BMA remains group supervisor. A summary of the Group Rules is set forth below. 25 The following requirements of the Group Rules discussed below are not yet required as at December 31, 2012: (i) compliance with a group enhanced capital requirement (‘‘Group ECR’’); (ii) compliance with group eligible capital requirements; (iii) ﬁling of the opinion of an approved actuary; and (iv) compliance with certiﬁcations by management and the parent company of the insurance group on the business solvency certiﬁcate included in the group statutory ﬁnancial return and on the group capital and solvency return. Annual Group Financial Statements. Every insurance group is required to prepare and submit, on an annual basis, Group ﬁnancial statements prepared in accordance with either the international ﬁnancial reporting standards (‘‘IFRS’’) or generally accepted accounting principles (‘‘GAAP’’), together with group statutory ﬁnancial statements. The Group GAAP ﬁnancial statements must be audited annually by the group’s approved auditor who is required to prepare an auditor’s report thereon in accordance with generally accepted auditing standards. In addition, every insurance group must prepare group statutory ﬁnancial statements (which will include, in statutory form, a group balance sheet, a group income statement, a group statement of capital and surplus, and notes thereto). The Designated Insurer is required to ﬁle with the BMA the group statutory ﬁnancial statements and the audited Group GAAP ﬁnancial statements with the BMA within ﬁve months from the end of the relevant ﬁnancial year (unless speciﬁcally extended). Annual Group Statutory Financial Return and Annual Capital and Solvency Return. Every insurance group is required to prepare an annual group statutory ﬁnancial return which shall include, among other things, a report of the approved group auditor, an insurance group business solvency certiﬁcate, the opinion of a group actuary, an insurance group capital and solvency certiﬁcate (and a declaration signed by two directors of the Designated Insurer and either the chief risk or chief ﬁnancial officer of the parent company declaring that the return fairly represents the ﬁnancial condition of the insurance group in all material respects). Both the annual group statutory ﬁnancial return and the group capital and solvency return must be submitted to the BMA by the Designated Insurer within ﬁve months after its ﬁnancial year end (unless speciﬁcally extended). Quarterly Group Financial Statements. The Designated Insurer is required to prepare and ﬁle quarterly group ﬁnancial returns with the BMA on or before the last day of the months May, August and November of each year. Group MSM and Group ECR. The Designated Insurer must ensure that the value of the insurance group’s assets exceeds the amount of the group’s liabilities by the Group MSM. A member is a qualifying member of the insurance group if it to solvency requirements in the jurisdiction in which it is registered. is subject Where the parent company exercises control in relation to any member of the group, the minimum margin of solvency of such member shall be its individual MSM. Where the parent company exercises signiﬁcant inﬂuence on any member of the group, the minimum margin of solvency applicable to that member for purposes of calculating the Group MSM shall be an amount equal to the parent company’s percentage shareholding in the member multiplied by that member’s minimum margin of solvency. ‘‘Control’’ and ‘‘signiﬁcant inﬂuence’’ shall be determined in accordance with either the IFRS or GAAP used to prepare the insurance group’s ﬁnancial statements. Group Eligible Capital. To enable the BMA to better assess the quality of the group’s capital resources, the Designated Insurer is required to disclose the makeup of its group’s capital in accordance with a ‘‘3-tiered capital system’’. Under this system, all of the insurance group’s capital instruments will be classiﬁed as either basic or ancillary capital which in turn will be classiﬁed into one of 3 tiers based on their ‘‘loss absorbency’’ characteristics. Highest quality capital will be classiﬁed Tier 1 Capital, lesser quality capital will be classiﬁed as either Tier 2 Capital or Tier 3 Capital. Under this regime, not more than certain speciﬁed percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to satisfy the Group’s MSM and Group ECR requirements. Tier 1, Tier 2 and Tier 3 Capital may, until January 1, 2024, include capital instruments that do not satisfy the requirement that the instrument be non-redeemable or settled only with the issuance of an instrument of equal or higher quality upon a breach, or if redemption would cause a breach, of the Group ECR. 26 Group Governance. Group Rules require the Parent Board to establish and effectively implement corporate governance policies and procedures, which it must be periodically review to ensure they continue to support the overall organizational strategy of the group. In particular, the Parent Board must: • • • • • ensure that operational and oversight the group are clearly deﬁned and documented and that the reporting of material deﬁciencies and fraudulent activities are transparent and devoid of conﬂicts of interest; responsibilities of establish systems for identifying on a risk sensitive basis those policies and procedures that must be reviewed annually and those policies reviewed at other regular intervals; and procedures that must be establish a risk management and internal controls framework and ensure that it is assessed regularly and such assessment is reported to the Parent Board and the chief and senior executives; establish and maintain sound accounting and ﬁnancial reporting procedures and practices for the group; and establish and keep under review group functions relating to actuarial, compliance, internal audit and risk management functions which must address certain speciﬁc requirements as set out in the Group Rules. Designated Insurer Notiﬁcation Obligations. The Designated Insurer must notify the BMA upon reaching a view that there is a likelihood of the insurance group or any member of the group becoming insolvent or that a reportable ‘‘event’’ has, to the Designated Insurer’s knowledge, occurred or is believed to have occurred. Examples of a reportable ‘‘event’’ include a failure by the insurance group or any member of the group to comply substantially with a requirement imposed upon it under the Group Rules relating to its solvency position, governance and risk management or supervisory reporting and disclosures; failure by the Designated Insurer to comply with a direction given to it under the Insurance Act in respect of the group or any of its members; a criminal conviction imposed upon any member of the group whether in Bermuda or abroad; material breaches of any statutory requirements by any member of the group located outside of Bermuda that could lead to supervisory or enforcement action by a competent authority; or a signiﬁcant loss that is reasonably likely to cause the insurance group to be unable to comply with its Group ECR. Within 30 days of such notiﬁcation to the BMA, the Designated Insurer must furnish the BMA with a written report setting out all the particulars of the case that are available to it and within 45 days it must furnish a group capital and solvency return that reﬂects the Group ECR that has been prepared using post-loss data and unaudited ﬁnancial statements for such period as the BMA shall require together with a declaration of solvency in respect thereof. In respect of the parent company of an insurance group, the Designated Insurer is required to give written notice to the BMA of the fact that a person has become, or ceased to be, a controller or officer of the parent company of an insurance group within 45 days of becoming aware of such fact. An officer in relation to the parent company of an insurance group means a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, ﬁnance or investment matters. BMA’s Powers of Intervention, Obtaining Information, Reports and Documents and Providing Information to other Regulatory Authorities. The BMA has certain powers of investigation and intervention relating to insurers and their holding companies, subsidiaries and other affiliates, which it may exercise in the interest of such insurer’s policyholders or if there is any risk of insolvency or of a breach of the Insurance Act or the insurer’s license conditions. Certain Bermuda Law Considerations Maiden Holdings and Maiden Bermuda have been designated as non-resident for exchange control purposes by the BMA and are required to obtain the permission of the BMA for the issue and transfer of all of their shares. The BMA has given its consent for: • the issue and transfer of Maiden Holdings’ common shares, up to the amount of its authorized capital from time to time, to and among persons that are non-residents of Bermuda for exchange control purposes; and 27 • the issue and transfer of up to 20% of Maiden Holdings’ common shares in issue from time to time to and among persons resident in Bermuda for exchange control purposes. Transfers and issues of Maiden Holdings’ common shares to any resident in Bermuda for exchange control purposes may require speciﬁc prior approval under the Exchange Control Act 1972. Maiden Bermuda’s common shares cannot be issued or transferred without the consent of the BMA. Because we are designated as non-resident for Bermuda exchange control purposes, we are allowed to engage in transactions, and to pay dividends to Bermuda non-residents who are holders of our common shares, in currencies other than the Bermuda Dollar. United States Maiden US, our lead U.S. insurer domiciled in Missouri, is an accredited reinsurer in 6 states and an authorized insurer in 45 jurisdictions. Maiden Specialty is a licensed insurer in its state of domicile, North Carolina, and is an eligible excess and surplus lines carrier in 50 jurisdictions (Maiden Specialty primarily writes insurance on a surplus lines basis). Regulatory, supervisory and administrative authority is primarily delegated to the states with the exception of federal authority over boycott, coercion and intimidation, federal antitrust laws and where federal law is enacted speciﬁcally to regulate the business of insurance. Among other things, state insurance departments regulate insurer solvency standards, insurer and agent licensing, authorized investments, premium rates, loss and expense reserves and provisions for unearned premiums, and deposits of securities for the beneﬁt of policyholders. The states’ regulatory schemes also extend to policy form approval and market conduct regulation. In addition, some states have enacted variations of competitive rate making laws, which allow insurers to set premium rates for certain classes of insurance without obtaining the prior approval of the state insurance department. Maiden US and Maiden Specialty are required to ﬁle detailed ﬁnancial statements and other reports with the departments of insurance in all states in which they are licensed to transact business. These ﬁnancial statements are subject to the supervision, regulation and periodic examination by the department of insurance (‘‘DOI’’) in the state in which they are domiciled. State Insurance Department Examinations Our U.S. insurance subsidiaries are subject to the supervision and regulation of the state in which they are domiciled. As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the ﬁnancial reporting of insurance companies domiciled in their states, generally once every three to ﬁve years. Examinations are generally carried out in cooperation with the insurance Insurance departments of other states under guidelines promulgated by the National Association of Commissioners (‘‘NAIC’’). Statutory Accounting Principles Statutory accounting principles (‘‘SAP’’) are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at ﬁnancial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state. U.S. GAAP is concerned with a company’s solvency, but is also concerned with other ﬁnancial measurements, principally income and cash ﬂows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reﬂected in ﬁnancial statements prepared in accordance with U.S. GAAP compared to SAP. Statutory accounting practices established by the NAIC and adopted in part by Missouri will determine, income of Maiden US, and thus among other things, determine, in part, the amount of funds that are available to pay dividends to Maiden NA. the amount of statutory surplus and statutory net 28 Holding Company Regulation Maiden US and Maiden Specialty are subject to U.S. statutory holding company laws of their respective states of domicile. The insurance holding company laws and regulations apply directly to individual insurers and indirectly to non-insurance holding companies. They vary from state to state, but generally require licensed insurers that are subsidiaries of insurance holding companies to register and ﬁle with state regulatory authorities certain reports including information concerning their capital structure, ownership, ﬁnancial condition and general business operations. All transactions involving the insurers in a holding company system and their affiliates must be fair and reasonable and, if material, require prior notice and approval or non-disapproval by the state insurance department of their domicile. Prior to February 2, 2012, entry by Maiden US into certain material transactions with AmTrust or its affiliates required prior notice to and approval of the Missouri DOI. This requirement has been rescinded and now applies only to our direct and indirect subsidiaries. Further, state insurance holding company laws typically place limitations on the amounts of dividends or other distributions payable by insurers. Payment of ordinary dividends by Maiden US requires prior approval of the Director of the Missouri DOI unless dividends will be paid out of ‘‘earned surplus’’. ‘‘Earned surplus’’ is an amount equal to the unassigned funds of an insurer as set forth in the most recent annual statement of the insurer including all or part of the surplus arising from unrealized capital gains or revaluation of assets. Extraordinary dividends generally require 30 days prior notice to and non-disapproval of the Missouri DOI before being paid. An extraordinary dividend includes any dividend whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the greater of: (1) 10% of the insurer’s surplus as regards policyholders as of December 31 of the prior year, or (2) the net income of the insurer, not including realized capital gains, for the 12 month period ending December 31 of the prior year, but does not include pro rata distributions of any class of the insurer’s own securities. State insurance holding company laws also require prior notice and state insurance department approval of changes in control of an insurer or its holding company. ‘‘Control’’ is generally deﬁned as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Maiden US is domiciled in Missouri where any beneﬁcial owner of 10% or more of the outstanding voting securities of an insurance company or its holding company is presumed to have acquired control, unless this presumption is rebutted. Maiden Specialty is domiciled in North Carolina, which determines control in the same manner. Therefore, an investor who intends to acquire beneﬁcial ownership of 10% or more of our outstanding voting securities may need to comply with these laws and would be required to ﬁle notices and reports with the Missouri DOI and receive approval from the Missouri DOI or rebut the presumption of control before such acquisition. An investor acquiring beneﬁcial ownership would need to obtain approval as to the change of control of Maiden Specialty from the North Carolina DOI or rebut the presumption of control. Risk-Based Capital U.S. insurers are also subject to risk-based capital (‘‘RBC’’) guidelines that provide a method to measure the total adjusted capital (statutory capital and surplus plus other adjustments) of insurance companies taking into account the risk characteristics of a company’s investments and products. The RBC formulas establish capital requirements for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. For each category, the capital requirement is determined by applying factors to asset, premium and reserve items, with higher factors applied to items with greater underlying risk and lower factors for less risky items. Insurers that have less statutory capital than the RBC calculation required are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy. The RBC formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank such companies. Maiden US has satisﬁed the RBC formula and has exceeded all recognized industry solvency standards. As of December 31, 2012, Maiden US and Maiden Specialty each had adjusted capital in excess of amounts requiring company or regulatory action. 29 Reinsurance if it can obtain credit The ability of a primary insurer to take credit for the reinsurance purchased from reinsurance companies is a signiﬁcant component of reinsurance regulation. Typically, a primary insurer will only enter into a reinsurance agreement to its reserves on its statutory ﬁnancial statements for the reinsurance ceded to the reinsurer. With respect to U.S. domiciled reinsurers that reinsure U.S. insurers, credit is usually granted when the reinsurer is licensed or accredited in a state where the primary insurer is domiciled or, in some instances, in a state in which the primary insurer is licensed. States also generally permit primary insurers to take credit for reinsurance if the reinsurer is (i) domiciled in a state with a credit for reinsurance law that is substantially similar to the standards in the primary insurer’s state of domicile, and (ii) meets certain ﬁnancial requirements. Credit for reinsurance purchased from a reinsurer that does not meet the foregoing conditions is generally allowed to the extent that such reinsurer secures its obligations with qualiﬁed collateral. Some states impose requirements that make it difficult to become licensed or accredited as a reinsurer. NAIC Ratios The NAIC Insurance Regulatory Information System (‘‘IRIS’’) was developed to help state regulators identify companies that may require special attention. IRIS is comprised of statistical and analytical phases consisting of key ﬁnancial ratios whereby ﬁnancial examiners review annual statutory basis statements and ﬁnancial ratios. Each ratio has an established ‘‘usual range’’ of results and assists state insurance departments in executing their statutory mandate to oversee the ﬁnancial condition of insurance companies. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for ﬁnancially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of speciﬁc transactions that are in themselves immaterial. Generally, an insurance company will become subject to regulatory scrutiny and may be subject to regulatory action if it falls outside the usual ranges of four or more of the ratios. As of December 31, 2012, Maiden US and Maiden Specialty did not have an IRIS ratio range warranting any regulatory action. State Legislative and Regulatory Changes From time to time, various regulatory and legislative changes are proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The NAIC’s Solvency Modernization Initiative (‘‘SMI’’) began in 2008. The primary focus of SMI is the review of insurer solvency regulations throughout the U.S. and the development of long-term solvency modernization objectives. Included within the NAIC’s scope of review for SMI purposes is the U.S. insurer solvency framework, international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in U.S. insurance regulation. While the U.S. insurance solvency regulation is updated on a continuous basis, the SMI will focus on ﬁve key solvency areas: capital requirements; international accounting; insurance valuation; reinsurance; and group regulatory issues. The SMI will highlight the strengths of the state-based national system of insurance regulations and identify improvements that might be made. All work on the project is expected to be completed in 2013. To enhance U.S. regulatory system for group supervision, the NAIC adopted the revised Insurance Holding Company System Regulatory Act (Model #440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (Model #450) in 2010. The revisions included the following: expanded ability to evaluate any entity within an insurance holding company system; enhancements to the regulator’s rights to access books and records and compelling production of information; establishment of expectation of funding with regard to regulator participation in supervisory colleges; and enhancements in corporate governance, such as board of directors and senior management responsibilities. Additionally, regulators adopted an expansion to the Insurance Holding Company System Annual Registration Statement (Form B) to broaden requirements to include ﬁnancial statements of all affiliates. A new Form F (Enterprise Risk Report) has also been introduced for ﬁrms to identify and report their enterprise risk. ‘‘Enterprise Risk’’ 30 the licensed insurance companies from enterprise risk, is deﬁned as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the ﬁnancial condition or the liquidity of the insurer or its insurance holding company system as a whole. If and when adopted by a the Amended Model Act and Regulation would impose more extensive informational particular state, requirements on us in order to protect including requiring us to prepare an annual enterprise risk report that identiﬁes the material risks within the insurance company holding system that could pose enterprise risk to the licensed insurer. The Amended Model Act and Regulation must be adopted by the individual states, and speciﬁcally states in which our U.S. insurance companies are domiciled, for the new requirements to apply to us. Ten states have adopted some or all of these changes; Missouri and North Carolina were not among the ten. It is anticipated that the NAIC will seek to make the amendments part of its accreditation standards for state solvency regulation, which would most likely motivate more states to adopt the amendments promptly. In addition to changes to NAIC Model #440 and NAIC Model #450, U.S. insurance regulators are currently implementing the international concept of the Own Risk and Solvency Assessment (‘‘ORSA’’). In an ORSA, every U.S. insurer (or their holding company group) will complete a self-assessment of their risk management, stress tests and capital adequacy on a yearly basis. Through ORSA, U.S. regulators will be able to add to their existing assessment of group capital with analysis of the company’s own assessment of group capital needs. In March 2012, the NAIC adopted the ORSA Guidance Manual that provides guidance to an insurer and/or the insurance group with regard to the NAIC adopted the Risk Management and Own Risk and reporting an ORSA. In September 2012, the legal framework for requiring a risk management Solvency Assessment. The Model Law sets out framework and the ﬁling of the summary report. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our operations and ﬁnancial condition. In July 2010, the President signed into law the Dodd-Frank Act, Title V of which included provisions known as the Non-admitted and Reinsurance Reform Act (‘‘NRRA’’). Under the NRRA, a ceding insurer’s credit for reinsurance is determined only by the insurance regulatory in its domiciliary state if that state is accredited by the NAIC. Additional protections are provided against extraterritorial application of non-domiciliary state laws. In addition, in 2011, the NAIC adopted revisions to its credit for reinsurance model law and regulation under which the level of required collateral required by U.S. regulators for non-U.S. reinsurers that are certiﬁed for reduced collateral would depend upon the reinsurer’s security rating and would range from 0% to 100% of gross assumed liabilities. A number of states are in the process of adopting and implementing the new models. Only Florida and New York have approved certiﬁed reinsurers for collateral reduction at this time. To the extent that these new state laws lead to a reduction of the collateral requirements for non-U.S. insurers, such changes could be beneﬁcial to Maiden Bermuda by permitting Maiden Bermuda to post less collateral to secure its reinsurance obligations to its U.S. ceding companies. At this time, we are unable to determine whether any additional changes in the U.S. reinsurance regulatory framework will be implemented based on the NAIC proposal and the effect, if any, such changes would have on our operations or ﬁnancial condition. Our insurance subsidiaries are required to comply with a wide variety of laws and regulations applicable to insurance or reinsurance companies, both in the jurisdictions in which they are organized and where they sell their insurance and reinsurance products. The insurance and regulatory environment, in particular for offshore insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the U.S., various states within the U.S. and the EU. In the past, there have been Congressional and other initiatives in the U.S. regarding increased supervision and regulation of the insurance industry. It is not possible to predict the future impact of changes in laws and regulations on our operations. The cost of complying with any new legal requirements affecting our subsidiaries could have a material adverse effect on our business. In addition, our subsidiaries may not always be able to obtain or maintain necessary licenses, permits, authorizations or accreditations. They also may not be able to fully comply with, or to obtain appropriate exemptions from, the laws and regulations applicable to them. Any failure to comply with applicable law or to obtain appropriate exemptions could result in restrictions on either the ability of the company in question, as 31 well as potentially its affiliates, to do business in one or more of the jurisdictions in which they operate or on brokers on which we rely to produce business for us. In addition, any such failure to comply with applicable laws or to obtain appropriate exemptions could result in the imposition of ﬁnes or other sanctions. Any of these sanctions could have a material adverse effect on our business. To date, no material ﬁne, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation. International Standards to basic regulatory issues such as accounting, U.S. federal and state regulators have committed in principle to adopting international standards with respect risk management, and corporate governance. International regulatory considerations are increasingly being deliberated by the NAIC and could increase regulatory burdens for Maiden US and Maiden Specialty and have the potential to negatively impact all U.S. insurers, regardless of size. Various trade associations and industry participants are aggressively working to impact the ﬁnal outcome of these deliberations is unknown at this time. the NAIC adoption of these standards. However, Federal Although the U.S. federal government typically does not directly regulate the business of insurance and reinsurance, federal initiatives often have an impact on the insurance industry. From time to time, various federal regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers. The extreme turmoil in the ﬁnancial markets has increased the likelihood of changes in the way the ﬁnancial services industry is regulated. While we cannot predict the exact nature, timing or scope of possible governmental initiatives, there may be increased regulatory intervention in our industry in the future. In recent years, the U.S. federal government has increased its scrutiny of the insurance regulatory framework and in July 2010 enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’), which is discussed below. Additionally, the 2014 budget proposed by President Obama includes a provision that for certain reinsurance premiums paid to affiliated foreign insurance would change the tax treatment companies. We are unable to predict what laws and regulations will be proposed or adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and ﬁnancial condition. McCarran-Ferguson Act Proposals to repeal the McCarran-Ferguson Act antitrust exemption for the insurance industry periodically are made, including in recent years, but have been unsuccessful. The antitrust exemption allows insurers to compile and share loss data, develop standard policy forms and manuals and predict future loss costs with greater reliability, among other things. The ability of the industry, under the exemption permitted in the McCarran-Ferguson Act, to collect loss cost data and build a credible database as a means of predicting future loss costs is an important part of cost-based pricing. If the ability to collect this data was removed in the future, the predictability of future loss costs and the reliability of pricing could be undermined. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank became law in July 2010. Dodd-Frank creates a new source of regulation and supervision of the insurance industry at the federal level. Dodd-Frank’s requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (property or casualty insurance placed from insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular state). Dodd-Frank also establishes a new Federal Insurance Office (‘‘FIO’’) within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance, in order to, among other things, monitor aspects of the insurance industry, identify issues in the regulation of insurers that could contribute to a systemic crises in the insurance industry or the overall ﬁnancial system, coordinate federal policy on international insurance matters and preempt state insurance measures under certain circumstances. Congress ultimately limited the scope of the FIO and recognized that it should not be a duplicate federal insurance regulator. The office is restricted primarily to monitoring the industry and advising Congress and federal agencies on insurance issues. However, federal regulators will 32 have vast discretion over how this oversight is executed. Dodd-Frank calls for numerous studies and contemplates further regulation, the timing and impact of which is uncertain. Dodd-Frank clariﬁcation bills were advanced during 2011 that could reduce costly, duplicative information requests on insurers, and prevent insurers from being subjected to bank-centric rules. Any additional legislation or regulatory requirements imposed in connection with Dodd-Frank or other regulatory reform may have an adverse effect on the operation of the Company and its subsidiaries. The Terrorism Risk Insurance Program Reauthorization Act of 2007 insured losses that exceed insurer deductibles, subject The Terrorism Risk Insurance Program Reauthorization Act of 2007 (‘‘TRIA’’) was signed into law by President Bush on December 26, 2007. This law renews the prior federal terrorism risk insurance program through December 31, 2014. The program includes protections for acts of domestic terrorism. The insurer deductible is ﬁxed at 20% of an insurer’s direct earned premium, and the federal share of compensation is ﬁxed at 85% of to a $100 billion cap. The U.S. Treasury Department is required to promulgate regulations to determine the pro-rata share of insured losses if they exceed the $100 billion cap. In addition, clear and conspicuous notice to policyholders of the $100 billion cap is required. Under the program reauthorization, the trigger at which federal compensation becomes available remains ﬁxed at $100 million per year through 2014. Under the TRIA Extension of 2007, the deﬁnition of ‘‘acts of terrorism’’ has been expanded to include ‘‘domestic terrorism’’, which could impact insurance coverage and have an adverse effect on our clients, the industry and us. There is also no assurance that TRIA will be extended beyond 2014 on either a temporary or permanent basis and its expiration could have an adverse effect on our clients, the industry or us. TRIA does not apply to reinsurers directly but does apply directly to insurers and to excess and surplus lines insurers, like Maiden Specialty. Taxation of the Company and its Subsidiaries The following summary of the taxation of Maiden Holdings, Maiden US, Maiden Specialty, Maiden Bermuda and the companies formed and/or acquired in the IIS Acquisition, including Maiden Global, OVS and Maiden LF, is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could affect this summary. Certain subsidiaries of ours are subject to taxation related to operations in Australia, Germany, Russia, Sweden, the United Kingdom and the United States. The discussion below covers the principal locations for which the Company or its subsidiaries are subject to taxation. Bermuda Maiden Holdings and Maiden Bermuda have each received from the Minister of Finance an assurance under The Exempted Undertakings Tax Protection Act, 1966, as amended of Bermuda, to the effect that in the event that there is any legislation enacted in Bermuda imposing tax computed on proﬁts or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to Maiden Holdings or Maiden Bermuda or to any of their operations or the shares, debentures or other obligations of Maiden Holdings or Maiden Bermuda until March 31, 2035. These assurances are subject to the proviso that they are not construed to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda (Maiden Holdings and the application of any tax payable in Maiden Bermuda are not currently so designated) or to prevent accordance with the provisions of The Land Tax Act, 1967 of Bermuda or otherwise payable in relation to the property leased to Maiden. Germany Maiden Germany GmbH (‘‘Maiden Germany’’), which is a wholly owned subsidiary of Maiden Global, is the majority shareholder of OVS. Maiden Germany is subject to German corporate income tax at a rate of 15.0% plus a solidarity surcharge of 5.5% thereon (in the aggregate, a rate of 15.825%). In addition, a trade tax at a rate of 13.65% resulting from the registered seat of the company in German municipal Russelsheim is paid. 33 Maiden Germany is not engaged in general commerce and Maiden Germany owns 90% of the shares in OVS. Maiden Germany. OVS implemented a tax unity by entering into a proﬁt and loss pooling agreement with a retroactive effect from January 1, 2011, which results that all proﬁts and losses generated at the level of OVS are attributed to Maiden Germany. The non-affiliated shareholder that holds the remaining 10% stake in OVS receives a ﬁxed annual compensation of €45,000 from Maiden Germany, since all income is attributed to Maiden Germany as a result of the tax unity. OVS, also with its registered seat in Russelsheim, is subject to the same German corporate income tax at a rate of 15% plus solidarity surcharge of 5.5% thereon (in the aggregate, a rate of 15.825%) and German trade tax at a rate of 13.65%. OVS is engaged in general commerce as an insurance agency. The taxable income of a German corporate entity is in principle, absent a Treaty exemption, the total amount of worldwide income (current proﬁts, capital gains) after deduction of business expenses. In general, income from dividend and capital gains arising upon the sale of shares in corporate entities are, in principle, fully tax exempt. However, a lump sum of 5% of the dividend/capital gains is added back to the taxable income, representing non-deductible business expenses. Since there is a tax unity in place between Maiden Germany and OVS, the tax exemption for dividends received by OVS is (due to the tax unity) not granted to OVS, but rather to Maiden Germany, the 90% shareholder. Any income generated by OVS is directly attributable to Maiden Germany under the proﬁt and loss pooling agreement and therefore taxed at the level of Maiden Germany. Thus, no dividend payment by OVS to Maiden Germany is required. However, 4/3 of the amount of the guaranteed dividend to the non-affiliated shareholder is taxed to OVS as its own taxable income. Maiden Germany has obtained obtained a withholding tax exemption certiﬁcate from the Federal Central Tax Office such that any dividend paid to Maiden Global is exempt from German withholding tax. There is no German withholding tax on (non-proﬁt related) interest payments to corporate shareholders. Other than Maiden Germany and OVS, we believe that the Company has operated and will continue to operate its business in a manner that will not cause its affiliates to be treated as engaged in a trade or business within Germany. A trade or business in Germany requires a permanent establishment either in the form of a ﬁxed place of business or by having a permanent representative on German ground. A subsidiary may qualify as permanent representative if it carries out business activities of its shareholder or an affiliate in Germany. Germany imposes an insurance tax (excise tax) on auto insurance premiums paid to insurers which reside in Germany. The tax rate generally applicable is 19% of the insurance premium. If the insurer resides in a member state of the European Community or in a third country, the insurance tax on insurance premiums will in principle only be levied if the policy-holder is a resident of Germany or if the insured car is registered in Germany. There is generally no excise tax on reinsurance premiums. Sweden Maiden LF is subject to Swedish taxation on net proﬁts irrespective of whether the proﬁts are generated through business in general or capital. To the extent that net proﬁts are generated, proﬁts are taxed at a rate of 22%. Foreign entities are subject to tax in Sweden only to the extent they have a permanent establishment in Sweden or if the income is related to certain types of assets, typically real estate, or partnership income. Dividends paid to foreign shareholders may be subject to withholding tax with a maximum of 30% although in many cases tax is reduced as a result of a tax treaty or under domestic legislation. A foreign entity is deemed to have a permanent establishment in Sweden under the rules very similar to those applied by OECD. Other than Maiden LF, we believe that Maiden has operated and will continue to operate its business in a manner that will not cause it to be treated as having a permanent establishment in Sweden. There is no withholding tax on interest paid by a Swedish borrower to a foreign lender. United Kingdom Maiden Global is tax resident in the U.K. and is currently subject to corporation tax in the U.K. on its trading and other taxable proﬁts. The full rate of U.K. corporation tax is currently 24%, falling to 23% from 1 April 2013. Non-U.K. resident corporations will only be within the charge to corporation tax in the U.K. if they carry on a trade in the U.K. in the U.K. Non-U.K. resident corporations which are not entitled to treaty relief may be subject to U.K. income tax on U.K. source trading proﬁts at the rate of 20% if they carry on a trade in the U.K. Reinsurance business developed by Maiden Global is underwritten by Maiden Bermuda in Bermuda. Other than in respect of Maiden Global, we believe through a permanent establishment 34 that the Company has operated and will continue to operate its business in a manner that will not cause it to be treated as engaged in a trade within the U.K. Dividends paid by Maiden Global will not be subject to deduction or withholding for or on account of U.K. tax. Interest paid by Maiden Global will be subject to deduction of U.K. income tax at the rate of 20%, subject to the availability of treaty relief. United States Maiden NA and its subsidiaries, including Maiden US and Maiden Specialty (collectively, the Maiden US Companies), transact business in and are subject to taxation in the United States. Other than the Maiden US Companies, we believe that we have operated and will continue to operate our business in a manner that will not cause us to be treated as engaged in a trade or business within the United States. On this basis, other than the Maiden US Companies, we do not expect to be required to pay US corporate income taxes (other than withholding taxes as described below). However, because there is considerable uncertainty as to the activities that constitute a trade or business in the United States, there can be no assurance that the Internal Revenue Service will not contend successfully that the Company or its non-U.S. subsidiaries are engaged in a trade or business in the United States. The maximum federal tax rate is currently 35% for a corporation’s income that is effectively connected with a trade or business in the United States. In addition, U.S. branches of foreign corporations may be subject to the branch proﬁts tax, which imposes a tax on U.S. branch after-tax earnings that are deemed repatriated out of the United States, for a potential maximum effective federal tax rate of approximately 54% on the net income connected with a U.S. trade or business. Foreign corporations not engaged in a trade or business in the United States are subject to U.S. income tax, effected through withholding by the payer, on certain ﬁxed or determinable annual or periodic gains, proﬁts and income derived from sources within the United States as enumerated in Section 881(a) of the Internal Revenue Code, such as dividends and interest on certain investments. The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign to risks located in the United States. The rate of tax applicable to insurers or reinsurers with respect reinsurance premiums paid to Maiden Bermuda is 1% of gross premiums. Where You Can Find More Information We maintain our principal website at www.maiden.bm. The information on our websites is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through our principal website, our ﬁnancial information, including the information contained in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports ﬁled or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), as soon as reasonably practicable after we electronically ﬁle such material with, or furnish such material to, the SEC. We also make available, free of charge through our principal website, our Audit Committee Charter, Compensation Committee Charter, Nominating & Corporate Governance Committee Charter, and Code of Business Conduct and Ethics. Such information is also available in print for any shareholder who sends a request to Maiden Holdings, Ltd., Maiden House, 131 Front Street, Hamilton HM 12, Bermuda, Attention: Secretary. Reports and other information we ﬁle with the SEC may also be viewed at the SEC’s website at www.sec.gov or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the SEC Public Reference Room may be obtained by calling the SEC at 800-SEC-0330. 35 Item 1A. Risk Factors Introduction Current and potential investors in the Company should be aware that, as with any publicly traded company, investing in our securities carries risk. Managing risk effectively is critical to our success, and our organization is built around intelligent risk assumptions and prudent risk management. We have identiﬁed what we believe reﬂect key signiﬁcant risks to the organization, and in turn to our shareholders, which are outlined below. Any of the risks described below could result in a signiﬁcant or material adverse effect on our results of operations or ﬁnancial condition. In addition to these enumerated risks, we face numerous other strategic, operational and emerging risks that could in the aggregate lead to shortfalls to our long-term goals or add to short-term volatility in our earnings. The following review of important risk factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The words or phrases believe, anticipate, estimate, project, plan, expect, intend, hope, forecast, evaluate, will likely result or will continue or words or phrases of similar import generally involve forward-looking statements. All of the risks that may affect our ﬁnancial or operating performance may not be material at this time but may become material in the future. As used in these Risk Factors, the terms ‘‘we’’, ‘‘our’’ or ‘‘us’’ may, depending upon the context, refer to the Company, to one or more of the Company’s consolidated subsidiaries or to all of them taken as a whole. Business Our business model is different than other Bermuda reinsurers. We believe our underwriting and investment strategies differ from other participants in the property and casualty reinsurance markets, particularly those based in Bermuda. Many publicly traded Bermuda reinsurance companies write property catastrophe reinsurance as a fundamental portion of their underwriting strategy. Additionally, many of these same reinsurers have substantial primary insurance operations in the U.S. and globally. We do not write property catastrophe reinsurance nor do we maintain substantial primary insurance operations. We write a limited amount of excess property primary business through Maiden Specialty. As a result, you may not be able to compare our business’s performance or prospects to other Bermuda-domiciled publicly traded reinsurers. We have engaged in a series of signiﬁcant transactions that may affect comparability and make it difficult for investors to evaluate our performance. We began underwriting reinsurance transactions in July 2007. As a result, there is limited historical information available to help investors evaluate our performance. In addition, in light of a series of signiﬁcant limited to) entering into the ACAC Quota Share in transactions during that March 2010, the IIS Acquisition in November 2010, the Senior Note Offerings, and the issuance of the Preference Shares in August 2012, our historical ﬁnancial statements are not necessarily meaningful for evaluating the potential of our future operations over a long term basis. including (but not time, We may not be able to manage our growth effectively. We expect our business to grow in the future as we continue our relationships with existing customers while seeking opportunities to reinsure other insurance companies operating in similar niches. We do not have speciﬁc targets or time frames for growth. Expansion of our business in the U.S. and internationally could require additional capital, systems development and skilled personnel. We cannot assure you that we will be able to meet our capital needs, expand our systems effectively, allocate our human resources optimally, identify and hire qualiﬁed employees or incorporate effectively the components of any businesses we may acquire. The failure to manage our growth effectively could have a material adverse effect on our business, ﬁnancial condition and results of operations. Ongoing economic uncertainty could materially and adversely affect our business, our liquidity and ﬁnancial condition. Global economies and ﬁnancial markets have experienced signiﬁcant weakness and volatility since 2008, although the most extreme of these circumstances have abated since that time. Despite robust ﬁnancial market 36 performance since 2009, near-term U.S. economic prospects have only very gradually improved, with unemployment continuing at historically elevated levels. In addition, U.S. federal and state governments continue to experience signiﬁcant structural ﬁscal deﬁcits, creating uncertainty as to levels of taxation, inﬂation, regulation and other economic fundamentals that may impact future growth prospects. Signiﬁcantly greater economic, ﬁscal and monetary uncertainty remains in Europe, due to the combination of poor economic growth, high unemployment and signiﬁcant sovereign deﬁcits which have called into question the future of the common currency used across most of Europe. While immediate concerns regarding the prospects of the European common currency abated somewhat in the second half of 2012, these issues remain unresolved and may have an indirect and potentially signiﬁcant impact on the U.S. economy, although these prospects are not clearly deﬁned at this time. Continuation of these conditions may potentially affect (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance. In the event that these conditions persist and result in a prolonged period of economic uncertainty, our results of operations, our landscape could be materially and ﬁnancial condition and/or adversely affected. liquidity, our prospects and competitor If opportunities for writing reinsurance and insurance through Maiden US do not materialize as we expect, our ﬁnancial condition and results of operations may be materially adversely affected. We believe that there will be opportunities to renew and write new reinsurance and insurance through Maiden US. However, we cannot assure you that Maiden US will retain its customers or write new business as we expect. Based upon industry developments in recent years, including the impact of Superstorm Sandy in 2012, pricing conditions may be improving which could enhance our ability to write new business. However, market conditions have been highly competitive for an extended period of time and the breadth (by line of business) and duration of any improved pricing environment which may develop is highly uncertain. In addition, other companies may continue to offer reinsurance and insurance products on more competitive terms than we can provide. Under these circumstances, we might not be able to expand our specialty property/ casualty reinsurance business and the failure to do so may have a material adverse effect on our ability to fully implement our business strategy, as well as on our ﬁnancial condition, results of operations and prospects. Our actual (re)insured losses may be greater than our reserve for loss and loss adjustment expenses, which would negatively impact our ﬁnancial condition and results of operations. We expect that our success will depend upon our ability to assess accurately the risks associated with the businesses that we will reinsure. Signiﬁcant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to an insurer and the reporting of the loss by the insurer to its reinsurer. After we begin to write reinsurance business and to recognize liabilities for unpaid losses, we will establish loss and loss adjustment expense reserves as balance sheet liabilities. These reserves will represent estimates of amounts needed to pay reported losses and unreported losses and the related loss adjustment expense. Loss reserves are only an estimate of what an insurer or reinsurer anticipates the ultimate costs of claims to be and do not represent an exact calculation of liability. Estimating loss reserves is a difficult and complex process involving many variables and subjective judgments. As part of our reserving process, we will review historical data as well as actuarial and statistical projections and consider the impact of various factors such as: • • • • • trends in claim frequency and severity; changes in operations; emerging economic and social trends; inﬂation; and changes in the regulatory and litigation environments. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any speciﬁc factor on the adequacy of reserves, and actual results are likely to 37 differ from original estimates. In addition, unforeseen losses, the type or magnitude of which we cannot predict, may emerge in the future. We will establish or adjust reserves for our insurance subsidiaries in part based upon loss data received from the ceding companies with which we do business, including AmTrust and ACAC. There is a time delay that elapses between the receipt and recording of claims results by the ceding insurance companies or by the managing general agents and the receipt and recording of those results by us. Accordingly, establishment and adjustment of reserves for our insurance subsidiaries is dependent upon timely and accurately estimate reporting from cedants and agents. To the extent our reserve for loss and loss adjustment expenses is insufficient to cover actual loss and loss adjustment expenses, we will have to adjust our reserve and may incur charges to our earnings, which could have a material adverse effect on our business, ﬁnancial condition and results of operations. The inherent uncertainty of models and the use of such models as a tool to evaluate risk may have an adverse impact on our ﬁnancial results. We use both our own proprietary models and widely accepted and industry-recognized third party vendor analytic and modeling capabilities to provide us with pricing, capital modeling and objective risk assessment relating to risks in our reinsurance portfolio. In addition, we also use widely accepted and industry-recognized third party vendor analytic and modeling capabilities to provide us with objective risk assessment relating to inform catastrophe risks in our reinsurance portfolio. These models help us control risk accumulation, management and other stakeholders of capital requirements and to improve the risk/return proﬁle or minimize the amount of capital required to cover the risks in each reinsurance contract in our overall portfolio of reinsurance contracts. However, given the inherent uncertainty of modeling techniques and the application of such techniques, these models and databases may not accurately address the emergence of a variety of matters which might be deemed to impact certain of our coverages. Accordingly, these models may understate the exposures we are assuming and our ﬁnancial results may be adversely impacted, perhaps signiﬁcantly. For our property and casualty reinsurance underwriting, we depend on the policies, procedures and expertise of ceding companies; these companies may fail to accurately assess and price the risks they underwrite, which may lead us to inaccurately assess and price the risks we assume. Because we participate in property and casualty reinsurance markets, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. As is common among reinsurers, we do not separately evaluate each of the individual risks assumed under reinsurance treaties. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates or fail to contractually limit our exposure to such risks, we could face signiﬁcant losses on these contracts, which could have a material adverse impact on our ﬁnancial results. Operational risks, including human or systems failures, are inherent in our business. Operational risks and losses can result from many sources including fraud, errors by employees, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements or information technology failures. We believe our modeling, underwriting and information technology and application systems are critical to our business and reputation. Moreover, our technology and applications have been an important part of our underwriting process and our ability to compete successfully. Such technology is and will continue to be a very important part of our underwriting process. We have also licensed certain systems and data from third parties. We cannot be certain that we will have access to these, or comparable service providers, or that our technology or applications will continue to operate as intended. In addition, we cannot be certain that we would be able to replace these service providers or consultants without slowing our underwriting response time. A major defect or failure in our internal controls or information technology and application systems could result in management distraction, harm to our reputation, a loss or delay of revenues or increased expense. 38 The occurrence of severe catastrophic events may have a material adverse effect on our ﬁnancial results and ﬁnancial condition. instability. While we attempt Although our business strategy generally precludes us from writing signiﬁcant amounts of catastrophe reinsurance segment, most property reinsurance contains some exposure to exposed business in our catastrophic loss. Our Diversiﬁed Reinsurance segment includes only limited exposure to natural and man-made disasters, such as hurricane, typhoon, windstorm, ﬂood, earthquake, acts of war, acts of terrorism and political to carefully manage our aggregate exposure to catastrophes, modeling errors and the incidence and severity of catastrophes, such as hurricanes, windstorms and large-scale terrorist attacks are inherently unpredictable, and our losses from catastrophes could be substantial. Further, many scientists believe that the earth’s atmospheric and oceanic temperatures are increasing and that, in recent years, changing climate conditions have increased the unpredictability, severity and frequency of natural disasters in certain parts of the world. In addition, it is possible that we may experience an unusual frequency of smaller losses in a particular period, as we did in 2011. Conversely, in 2012, we incurred substantial losses from a single event, Superstorm Sandy which, while consistent with our stated risk tolerance, did result in an operating loss in the fourth quarter of 2012. While we made an underwriting proﬁt in both of those years, nonetheless the consequences could be substantial volatility in our ﬁnancial condition or results of operations for any ﬁscal quarter or year, which could have a material adverse effect on our ﬁnancial condition or results of operations and our ability to write new business. These losses could deplete our shareholders’ equity. Increases in the values and geographic concentrations of insured property and the effects of inﬂation have resulted in increased severity of industry losses from catastrophic events in recent years and we expect that those factors will increase the severity of catastrophe losses in the future. We may face substantial exposure to losses from terrorism, acts of war and political instability. We have exposure to losses resulting from acts of terrorism, acts of war and political instability. U.S. insurers are required by state and federal law to offer coverage for terrorism in certain commercial lines. In response to the September 11, 2001 terrorist attacks, the Congress enacted legislation designed to ensure, among other things, the availability of insurance coverage for foreign terrorist acts, including the requirement that insurers offer such coverage in certain commercial lines. The TRIA requires commercial property and casualty insurance companies to offer coverage for certain acts of terrorism and established a federal assistance program through the end of 2005 to help such insurers cover claims related to future terrorism-related losses. The Terrorism Risk Insurance Extension Act (‘‘TRIEA’’) extended the federal assistance program through 2007, but it also set a per-event threshold that had to be met before the federal program would become applicable and also increased insurers’ statutory deductibles. The Terrorism Risk Insurance Program Revitalization Act the federal assistance program through 2014. (‘‘TRIPRA’’) currently extends TRIPRA also expanded the deﬁnition of Act of Terrorism by removing the distinction between foreign and domestic acts of terrorism. The federal terrorism risk assistance provided by TRIA, TRIEA and TRIPRA will expire at the end of 2014. Any renewal may be on substantially less favorable terms. Pursuant to the quota share agreements with AmTrust and ACAC and the reinsurance agreements that we anticipate that our reinsurance subsidiaries that write in the Diversiﬁed Reinsurance segment will enter into with others, our subsidiaries will reinsure a portion of each ceding insurer’s losses resulting from terrorism. With respect to those reinsurance agreements that we have entered into to date, either terrorism coverage is speciﬁcally excluded or we do not consider exposure to terrorist acts to be signiﬁcant. Although we expect that Maiden Bermuda will seek to retrocede some or all of this terrorism risk to unaffiliated reinsurers, it may be unable to do so on terms that it considers favorable, or at all. 39 We may or may not use retrocessional and reinsurance coverage to limit our exposure to risks. Any retrocessional or reinsurance coverage that we obtain may be limited, and credit and other risks associated with our retrocessional and reinsurance arrangements may result in losses which could adversely affect our ﬁnancial condition and results of operations. We will provide reinsurance to our clients and in turn we may or may not retrocede reinsurance we assume to other insurers and reinsurers. If we do not use retrocessional coverage or reinsurance, our exposure to losses will be greater than if we did obtain such coverage. If we do obtain retrocessional or reinsurance coverage, some of the insurers or reinsurers to whom we may retrocede coverage or reinsure with may be domiciled in Bermuda or other non-U.S. locations. We would be subject to credit and other risks that depend upon the ﬁnancial strength of these reinsurers. Further, we will be subject to credit risk with respect to any retrocessional or reinsurance arrangements because the ceding of risk to reinsurers and retrocessionaires would not relieve us of our liability to the clients or companies we insure or reinsure. Our failure to establish adequate reinsurance or retrocessional arrangements or the failure of any retrocessional arrangements to protect us from overly concentrated risk exposure could adversely affect our business, ﬁnancial condition and to mitigate such risks by retaining collateral or trust accounts for results of operation. We will attempt premium and claims receivables, but nevertheless we cannot be assured that reinsurance will be fully collectable in the case of all potential claims outcomes. The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some these changes may not become apparent until sometime after we have issued insurance or instances, reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our reinsurance contracts may not be known for many years after a contract is issued. Our exposure to these uncertainties could be exacerbated by an increase in insurance and reinsurance contract disputes, arbitration and litigation. A recent example of emerging claims and coverage issues is the growing trend of plaintiffs targeting property and casualty insurers in purported class action litigation relating to claims-handling, insurance sales practices and other practices related to the conduct of business in our industry. The effects of this and other unforeseen emerging claim and coverage issues are extremely hard to predict and could have a material adverse effect on our business, ﬁnancial condition and results of operations. The integration of acquired companies may not be as successful as we anticipate. Acquisitions involve numerous risks, including operational, strategic, and ﬁnancial risks such as potential liabilities associated with the acquired business. Difficulties in integrating an acquired company may result in the acquired company performing differently than we currently expect or in our failure to realize anticipated expense-related efficiencies. Our existing businesses could also be negatively impacted by acquisitions. Technology breaches or failures, including, but not limited to, those resulting from cyber-attacks on us or our business partners and service providers, could disrupt or otherwise negatively impact our business. While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is dependent upon our employees’ and outsourcers’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions. Like all companies, our information technology systems are vulnerable to data breaches, interruptions or failures due to events that may be beyond our control, including, but not limited to, natural disasters, theft, terrorist attacks, computer viruses, hackers and general technology failures. A shutdown or inability to access one or more of our facilities, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could signiﬁcantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Furthermore, a signiﬁcant portion of the communications between our employees and our business, banking and investment partners depends on information technology and electronic information exchange. 40 We believe that we have established and implemented appropriate security measures, controls and procedures to safeguard our information technology systems and to prevent unauthorized access to such systems and any data processed and/or stored in such systems, and we periodically employ third parties to evaluate and test the adequacy of such systems, controls and procedures. In addition, we have established a business continuity plan which is designed to ensure that we are able to maintain all aspects of our key business processes functioning in the midst of certain disruptive events, including any disruptions to or breaches of our information technology systems. Our business continuity plans are tested and evaluated for adequacy. Despite these safeguards, disruptions to and breaches of our information technology systems are possible and may negatively impact our business. It is possible that insurance policies we have in place with third-parties would not entirely protect us in the event that we experienced a breach, interruption or widespread failure of our information technology systems. Furthermore, we have not secured any insurance coverage designed to speciﬁcally protect us from the result of such events. Although we have experienced no known material or threatened cases involving unauthorized access to our information technology systems and data or unauthorized appropriation of such data to date, we have no assurance that such technology breaches will not occur in the future. Insurance and Reinsurance Markets The property and casualty insurance and reinsurance industry is cyclical in nature, which may affect our overall ﬁnancial performance. Historically, the ﬁnancial performance of the property and casualty insurance and reinsurance industry has tended to ﬂuctuate in cyclical periods of price competition and excess capacity (known as a soft market) followed by periods of high premium rates and shortages of underwriting capacity (known as a hard market). Although the ﬁnancial performance of an individual insurance or reinsurance company is dependent on its own speciﬁc business characteristics, the proﬁtability of most property and casualty insurance and reinsurance companies tends to follow this cyclical market pattern. Beginning in 2000 and accelerating in 2001, the property and casualty insurance and reinsurance industry experienced a market reﬂecting increasing premium rates and more conservative risk selection. These trends slowed beginning in 2004 and, in recent years market conditions have deteriorated at varying rates of speed with no reversals. Since that time through 2012, the market has been in a competitive environment in which underwriting capacity has expanded, risk selection became less discrete and price competition increased sharply. During that period, despite the signiﬁcant ﬁnancial turmoil that occurred in 2008, market participant’s capital levels have continued to improve due to positive earnings and improved values of risk assets over that time. This additional underwriting capacity resulted in increased competition from other insurance and reinsurance companies expanding the types or amounts of business they write, or from companies seeking to maintain or increase market share at the expense of underwriting discipline. Recent catastrophe activity since 2011 and including Superstorm Sandy in 2012 appear to have slowed the trend of competitive market conditions and potentially are suggestive of improved pricing conditions in the near term for market participants, particularly for primary insurers. General reinsurance industry pricing conditions excluding catastrophe results remain marginally positive presently. However, it is highly uncertain whether these market conditions are sustainable, and if so, for how long, given that industry capital levels appear to remain adequate. Because this cyclicality is due in large part to the actions of our competitors and general economic factors beyond our control, we cannot predict with certainty the timing or duration of changes in the market cycle. These cyclical patterns, the actions of our competitors, and general economic factors could cause our revenues and net income to ﬂuctuate, which may cause the price of our common shares to be volatile. The ultimate outcome of these events and their market impact is not known at this time. 41 Negative developments in the workers’ compensation insurance industry could adversely affect our ﬁnancial condition and results of operations. In 2012, reinsurance of workers’ compensation insurance was 20.6% of net premiums written, which continues a trend of decreases in this line of business as a percentage of total net premiums written in recent years, as the Company continues to diversify. Nonetheless, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have an adverse effect on our ﬁnancial condition and results of operations. For example, if legislators in our larger markets were to enact legislation to increase the scope or amount of beneﬁts for employees under workers’ compensation insurance policies without related premium increases or loss control measures, or if regulators this could made other changes to the regulatory system governing workers’ compensation insurance, negatively affect the workers’ compensation insurance industry in the affected markets. Currently, reductions in the number of people employed has affected the underlying payrolls which are generally the basis for insurance premiums charged and subsequently paid to reinsurers for the protection we offer. In many states, including California, our largest state in terms of workers’ compensation premium volume, there are active regulatory activities that oversee the level of rates that can be charged by individual insurers. As a result, there is a risk that our clients may not be able to implement needed rate increases to maintain sufficient levels of proﬁtability on business we write. We compete with a large number of companies in the reinsurance industry for underwriting revenues. The reinsurance industry is mature and highly competitive. Reinsurance companies compete on the basis of many factors, including premium rates, general reputation and perceived ﬁnancial strength, the terms and conditions of the products offered, ratings assigned by independent rating agencies, speed of claims payments, reputation and experience in risks underwritten, capacity and coverages offered and various other factors. These factors operate at the individual market participant level and generally in the aggregate across the reinsurance industry. In addition, underlying economic conditions and variations in the reinsurance buying practices of ceding companies, by participant and in the aggregate, contribute to cyclical movements in rates, terms and conditions and may impact industry aggregate results and subsequently the level of completion in the reinsurance industry. We compete with major U.S. and non-U.S. reinsurers, including other Bermuda-based reinsurers, on an international and regional basis. In our Diversiﬁed Reinsurance segment, we compete with reinsurers that provide property and casualty-based lines of reinsurance such as: Swiss Reinsurance Company Ltd., Munich Reinsurance America, Inc., General Reinsurance Corporation, PartnerRe Ltd., Hannover Re Group, QBE Insurance Group, Transatlantic Holdings, Inc., Endurance Specialty Holdings, Ltd., Scor Reinsurance Company, Platinum Underwriters Holdings, Ltd., The TOA Reinsurance Company of America, W.R. Berkley Corporation and Everest Re Group, Ltd. Many of these entities have signiﬁcantly larger amounts of capital, higher ratings from rating agencies and more employees than Maiden Holdings and its subsidiaries; in addition, these entities have established long-term and continuing business relationships throughout the industry, which can be signiﬁcant competitive advantages. However, we believe the enhanced security that we offer our clients through collateral trusts, our niche specialist orientation, our operating efficiency and our careful relationship management capabilities help offset these advantages and allow us to effectively compete for proﬁtable business. In addition, risk-linked securities and derivative and other non-traditional risk transfer mechanisms and vehicles are being developed and offered by other parties, including entities other than insurance and reinsurance companies. The availability of these non-traditional products could reduce the demand for traditional insurance and reinsurance. A number of new, proposed or potential industry or legislative developments could further increase competition in our industry. New competition from these developments may result in fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention and less favorable policy terms and conditions, which could have a material adverse impact on our growth and proﬁtability. 42 Consolidation in the insurance and reinsurance industry and increased competition on premium rates could lead to lower margins for us and less demand for our products and services. The insurance and reinsurance industry continues to undergo a process of consolidation as industry participants seek to enhance their product and geographic reach, client base, operating efficiency and general market power through merger and acquisition activities. We believe that the larger entities resulting from these mergers and acquisition activities may seek to use the beneﬁts of consolidation, including improved efficiencies and economies of scale, to, among other things, implement price reductions for their products and services to increase their market shares. Consolidation among primary insurance companies may also lead to reduced use of reinsurance as the resulting larger companies may be able to retain more risk and may also have bargaining power in negotiations with reinsurers. If competitive pressures compel us to reduce our prices, our operating margins will decrease. As the insurance and reinsurance industry consolidates, competition may become more intense and the importance of acquiring and properly servicing each customer will become greater. We could incur greater expenses relating to customer acquisition and retention, which could reduce our operating margins. When the property-casualty insurance industry has exhibited a greater degree of competition, premium rates have come under downward pressure as a result. Greater competition could result in reduced volumes of reinsurance written and could reduce our proﬁtability. Clients, Brokers and Financial Institutions Our business is dependent upon reinsurance brokers and other producers, including third party administrators and ﬁnancial institutions, and the failure to develop or maintain these relationships could materially adversely affect our ability to market our products and services. We market our reinsurance products primarily through brokers and expect that we will derive a signiﬁcant portion of our business from a limited number of brokers. Our failure to further develop or maintain relationships with brokers from whom we expect to receive our business could have a material adverse effect on our business, ﬁnancial condition and results of operations. Our reliance on brokers subjects us to their credit risk. In accordance with industry practice, we anticipate that we will frequently pay amounts owed on claims under our reinsurance contracts to brokers, and these brokers in turn are required to pay and will pay these amounts over to the clients that have purchased reinsurance from us. If a broker fails to make such a payment, in a signiﬁcant majority of business that we will write, it is highly likely that we will be liable to the client for the deﬁciency under local laws or contractual obligations, notwithstanding the broker’s obligation to make such payment. Likewise, when the client pays premiums for these policies to brokers for payment over to us, these premiums are considered to have been paid and, in most cases, the client will no longer be liable to us for those amounts, whether or not we actually receive the premiums from the brokers. Consequently, we will assume a degree of credit risk associated with brokers with whom we work with respect to most of our reinsurance business. We could incur substantial losses and reduced liquidity if one of the ﬁnancial institutions we use in our operations fails. We have exposure to counterparties in many different industries and routinely execute transactions with counterparties in the ﬁnancial services industry, including brokers and dealers, commercial banks, and other investment funds and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of risk of the reinsurers. reinsurance recoverables are subject the obligation. Current to the credit We maintain cash balances, including restricted cash held in premium trust accounts, signiﬁcantly in excess of the FDIC insurance limits at various depository institutions. We also maintain cash balances in foreign banks and institutions and rely upon funding commitments from several banks and ﬁnancial 43 institutions that participate in our credit facility. If one or more of these ﬁnancial institutions were to fail, our ability to access cash balances or draw down on our credit facility may be temporarily or permanently limited, which could have a material adverse effect on our results of operations, ﬁnancial condition or cash ﬂows. Financial Strength and Debt Ratings Ratings downgrades of either Maiden Bermuda, Maiden US and Maiden Specialty may adversely affect our competitive position and our ability to meet our ﬁnancial goals and capital requirements. Competition in the types of insurance business that we intend to reinsure is based on many factors, including the perceived ﬁnancial strength of the insurer and ratings assigned by independent rating agencies. Maiden Bermuda, Maiden US and Maiden Specialty have each received a ﬁnancial strength rating of ‘‘A-’’ (Excellent) with a stable outlook from A.M. Best, which is the fourth highest of sixteen rating levels. These subsidiaries have also received a ﬁnancial strength rating of BBB+ (Good) with a stable outlook from S&P, which is the eighth highest of twenty-two rating levels. Ratings from these agencies are an opinion of our ﬁnancial strength and ability to meet ongoing obligations to our future policyholders, and it is not an evaluation directed to our investors in our common shares, preference shares, senior notes or trust preferred securities, nor is it a recommendation to buy, sell or hold our common shares, preference shares, senior notes or trust preferred securities. Each rating should be evaluated independently of any other rating. The ratings of Maiden Bermuda, Maiden US and Maiden Specialty are subject to periodic review by, and may be revised downward or revoked at any time at the sole discretion of A.M. Best and/or S&P. If A.M. Best were to downgrade Maiden Bermuda’s rating below ‘‘A-’’, AII and other clients would have the right to terminate their respective reinsurance agreements. More generally, if A.M. Best or S&P were to downgrade Maiden Bermuda, Maiden US or Maiden Specialty, our competitive position would suffer, and our ability to market our products, to obtain customers and to compete in the reinsurance industry would be adversely affected. A subsequent downgrade, loss of business because our insurance and reinsurance company clients may move to other reinsurers with higher claims paying and ﬁnancial strength ratings. therefore, could result in a substantial Liquidity, Capital Resources and Investments A signiﬁcant amount of our invested assets are subject to changes in interest rates and market volatility. If we were unable to realize our investment objectives, our ﬁnancial condition and results of operations may be adversely affected. Investment income is an important component of our net income. We plan to invest approximately 90 − 95% of our investments in high grade marketable ﬁxed income securities, cash and cash equivalents, and up to approximately 5 − 10% in other securities which may include high-yield securities and equity securities. As of December 31, 2012, the ﬁxed income securities of $2.6 billion in our investment portfolio represented 92.4% of our total cash and invested assets, of which $2.9 million or 0.1% were in other investment funds. As a result of market conditions prevailing at a particular time, the allocation of our portfolio to various asset types may vary from these targets at times. The fair market value of these assets and the investment income from these assets will ﬂuctuate depending on general economic and market conditions. Because we intend to classify substantially all of our invested assets as available-for-sale (‘‘AFS’’), we expect changes in the market value of our securities will be reﬂected in shareholders’ equity. investment strategy with the assistance of AII Our board of directors has established our investment policies and our executive management is implementing our Insurance Management Limited, our investment manager. Although these guidelines stress diversiﬁcation and capital preservation, our investment results will be subject to a variety of risks, including risks related to changes in the business, ﬁnancial condition or results of operations of the entities in which we invest, as well as changes in general economic conditions and overall market conditions, interest rate ﬂuctuations and market volatility. Our investment portfolio consists almost completely of interest rate-sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. Interest rates are highly sensitive to many 44 factors, including governmental monetary policies and domestic and international economic and political conditions and other factors beyond our control. Because of the unpredictable nature of losses that may arise under reinsurance policies, our liquidity needs could be substantial and may increase at any time. Changes in interest rates could have an adverse effect on the value of our investment portfolio and future investment income. For example, changes in interest rates can expose us to prepayment risks on mortgage-backed securities included in our investment portfolio (all, excluding one Commercial Mortgage-Backed Security, are currently U.S. government agency-backed and AA+ rated). Increases in interest rates will decrease the value of our investments in ﬁxed-income securities. If increases in interest rates occur during periods when we sell investments to satisfy liquidity needs, we may experience investment losses. If interest rates decline, reinvested funds will earn less than expected. Certain categories of ﬁxed income securities can experience signiﬁcant price declines for reasons unrelated to interest rates. Since 2007, global ﬁnancial markets and credit markets in particular have experienced unprecedented volatility due to the effects of global economic weakness and resulting ﬁscal and monetary crises. Both the U.S. and other sovereign governments, particularly in Europe, have enacted and continue to enact signiﬁcant ﬁscal and monetary measures which have elevated levels of liquidity in the credit market place in order to ensure economic stability and sustain recent limited economic growth. These measures have reduced interest rates to historically low levels and could continue to affect many types of ﬁxed income securities, continuing the current period of higher than average price volatility. Based on the statements of the U.S. Federal Reserve and other central banks globally, this period of low interest rates is widely expected to continue for at least the next two years. In addition, these measures could increase the likelihood of inﬂation which would likely reduce the value of our ﬁxed income securities and reduce our shareholders’ equity. In order to limit our exposure to unexpected interest rate increases which would reduce the value of our ﬁxed income securities and reduce our shareholders’ equity, we have maintained the duration of our investment portfolio at 3.5 years as of December 31, 2012, which although higher than the duration of 2.8 years as of December 31, 2011, remains shorter than our duration of our loss reserves, which was 3.6 years at December 31, 2012. In order to provide additional portfolio protection, we also maintain 11.8% of our portfolio in variable or ﬂoating rate ﬁxed maturity securities. This increased duration is likely to increase the amount of investment income generated by our portfolio in 2013 and beyond, if the current interest rate environment does not change. We may invest a portion of our portfolio in below investment-grade securities. Borrowers that issue below investment-grade securities are more sensitive to adverse economic conditions, including a recession. The risk of default by these borrowers and the risk that we may not be able to recover our investment are signiﬁcantly greater than for other borrowers. We also may invest a portion of our portfolio in equity securities, including other investment funds, which are more speculative and more volatile than debt securities. While we believe we have substantially mitigated our exposure to liquidity risk through prudent duration management and strong operating cash ﬂow, if we do not structure our investment portfolio so that it is appropriately matched with our reinsurance liabilities, we may be forced to liquidate investments prior to maturity at a signiﬁcant loss to cover such liabilities. For this or any of the other reasons discussed above, investment losses could signiﬁcantly decrease our asset base, which would adversely affect our ability to conduct business. Any signiﬁcant decline in our investment income would adversely affect our business, ﬁnancial condition and results of operations. The further downgrade of U.S. government securities by credit rating agencies could adversely impact the value of the U.S. government and other securities in our investment portfolio and create uncertainty in the market generally. The further downgrade of the U.S. government securities by credit rating agencies has the potential to adversely impact the value of the U.S. government and other securities in our investment portfolio. A further downgrade in the rating of U.S. government securities may cause our investment portfolio’s average credit rating to fall and may result in the Company no longer being in compliance with its current investment policy at its current level of U.S. government security holdings. In addition to the foregoing, a further downgrade in 45 the rating of U.S. government securities may have an adverse impact on ﬁxed income markets, which in turn could cause our net investment income to decline or have a material adverse effect on our ﬁnancial condition. We may require additional capital in the future, which may not be available on favorable terms or at all. Our future capital requirements will depend on many factors, including our growth and our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover our losses. While we have been successful to date in raising the capital necessary to prudently manage our business, our business has grown rapidly and we may need to raise additional funds to further capitalize Maiden Bermuda, Maiden US and Maiden Specialty, or expand our IIS business. We anticipate that any such additional funds would be raised through equity, debt or hybrid ﬁnancings. While we currently have no to a credit facility or a loan facility, we may enter into an commitment from any lender with respect unsecured revolving credit facility or a term loan facility with one or more syndicates of lenders. Any equity, debt or hybrid ﬁnancing, if available at all, may be on terms that are not favorable to us. If we are able to raise capital through equity ﬁnancings, the interest of shareholders in our Company would be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common shares. In addition, the Senior Notes are both rated BBB- by S&P, which is considered investment grade by S&P, and the Preference Shares are rated BB by S&P, which is considered non-investment grade. To the extent that any of these securities experience a ratings downgrade or if our holding company experiences a downgrade of its Counterparty Credit rating by S&P, this could impact our ability to execute those ﬁnancings or at reasonable terms. Similarly, our access to funds may be impaired if regulatory authorities take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional ﬁnancing on favorable terms, or at all. Finally, the possibility that customers or lenders could develop a negative perception of our long or short-term ﬁnancial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn could affect our ability to obtain ﬁnancing. In addition to company-speciﬁc factors, the availability of additional ﬁnancing will depend on a variety of other factors such as market conditions, the general availability of capital, the volume of trading activities and the overall availability of capital to the ﬁnancial services industry. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter tenor securities than we prefer, or bear an unattractive cost of capital which could decrease our proﬁtability and signiﬁcantly reduce our ﬁnancial ﬂexibility. If we cannot obtain adequate capital, our business prospects, results of operations and ﬁnancial condition could be adversely affected. We have debt and preference shares outstanding that could adversely affect our ﬁnancial ﬂexibility. In connection with the TRUPS Offering, Maiden NA issued a subordinated debenture in the principal amount of $260.0 million, which is the subject of a subordinated guarantee by Maiden Holdings, which currently has an outstanding principal balance of $152.5 million. In addition, in connection with the Senior Note Offerings, Maiden NA has issued senior notes in the principal amount of $207.5 million, which is subject to a guarantee by Maiden Holdings and which is senior to the guarantee issued with the debenture issued in connection with the TRUPS Offering. In 2012, we issued $150.0 million in Preference Shares which are required to be paid before common shareholders are eligible for dividend payments. We may also incur in the future. The level of debt outstanding could adversely affect our additional ﬁnancial ﬂexibility. indebtedness Our indebtedness could have adverse consequences, including: • • • • limiting our ability to pay dividends to our common shareholders; increasing our vulnerability to changing economic, regulatory and industry conditions; limiting our ability to compete and our ﬂexibility in planning for, or reacting to, changes in our business and the industry; limiting our ability to borrow additional funds; 46 • • requiring us to dedicate a substantial portion of our cash ﬂow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes; and impacting rating agencies and regulators assessment of our capital position, adequacy and ﬂexibility and therefore, rating agencies and regulators assessment of our solvency. the ﬁnancial strength ratings of Our failure to comply with restrictive covenants contained in the indentures governing our Senior Notes or any future credit facility could trigger prepayment obligations, which could adversely affect our business, ﬁnancial condition and results of operations. The indentures governing our Senior Notes contain covenants that impose restrictions on us and certain of our subsidiaries with respect to, among other things, the incurrence of liens and the disposition of capital stock of these subsidiaries. In addition, any future credit facility may require us and/or certain of our subsidiaries to comply with certain covenants, which may include the maintenance of a minimum consolidated net tangible worth and restrictions on the payment of dividends. Our failure to comply with these covenants could result in an event of default under the indentures or any future credit facility, which, if not cured or waived, could result in us being required to repay the notes or any amounts outstanding under such credit facility prior to maturity. As a result, our business, ﬁnancial condition and results of operations could be adversely affected. For more details on our indebtedness, see Note 8 to our Consolidated Financial Statements. Under the terms of our TRUPS Offering, if we prepay the TRUPS before January 20, 2014 we are required to pay a premium to security holders. This premium, along with an amortized discount currently recorded as a reduction of a liability, would affect both results of operations and our book value. The terms of the TRUPS Offering stipulate that a premium equal to 14% of the value of the TRUPS would be payable to the holders of the TRUPS if we were to pay off the securities prior to January 20, 2014. Also, at the time of the TRUPS Offering, we issued 11.7 million common shares to the holders of the TRUPS in the TRUPS. The value assigned to these shares, which was Offering as an inducement $26.2 million at December 31, 2012, is recorded as a reduction of the liability for the TRUPS on our balance sheet and is being amortized into expense over the term of the TRUPS Offering (30 years) using the effective yield method. to invest In connection with the 2011 Senior Note Offering, we repurchased $107.5 million of the TRUPS and as a result, pursuant to the terms of the TRUPS Offering, we incurred a non-recurring repurchase expense of approximately $15.1 million, which was reported in our 2011 results of operations. As a result of the repurchase, we also incurred in 2011 an additional non-recurring non-cash charge of approximately $20.3 million, which represents the accelerated amortization of original issue discount and issuance costs associated with equity issued in conjunction with the TRUPS Offering. If we were to fully pay off the remaining securities prior to January 20, 2014, we would incur $21.4 million in additional expenses along with incurring additional amortization charges to write off the remaining unamortized amounts which are presently $26.2 million. Thus our results of operations and book value would be reduced commensurately. Although we have sufficient liquidity at this time to pay off the remaining securities associated with the TRUPS Offering, given the proximity to the expiration of that date, it is unlikely that we would pay off these securities prior to January 20, 2014 unless were able to achieve savings in excess of the remaining interest we are required to pay until that time, including any prepayment premium. At such time that we do pay off the remaining securities associated with the TRUPS Offering, we will the remaining unamortized amounts, whether it is before or after January 20, 2014. incur a charge for The Series A Preference Shares are equity and are subordinate to our existing and future indebtedness and other liabilities. The Series A Preference Shares are equity interests and do not constitute indebtedness. As such, the Series A Preference Shares will rank junior to all of our indebtedness and other non-equity claims of our liquidation. As of creditors with respect to assets available to satisfy our claims, including in our 47 December 31, 2012, our total consolidated debt was $333.8 million and our total consolidated liabilities were $3.1 billion. We may incur additional debt and liabilities in the future. Our existing and future indebtedness may restrict payments of dividends on the Series A Preference Shares. Additionally, unlike indebtedness, where principal and interest would customarily be payable on speciﬁed due dates, in the case of preference shares like the Series A Preference Shares, dividends are payable only if declared by our Board of Directors (or a duly authorized committee of the Board). The availability and cost of security arrangements for reinsurance transactions may materially impact our ability to provide reinsurance from Bermuda to insurers domiciled in the U. S. Maiden Bermuda is not licensed, approved or accredited as a reinsurer anywhere in the U.S. and, therefore, under the terms of most of its contracts with U.S. ceding companies, it is required to provide collateral to its ceding companies for unpaid ceded liabilities, including when our obligations to these ceding companies exceed negotiated amounts, in a form acceptable to state insurance commissioners. Typically, this type of collateral takes the form of letters of credit issued by a bank, the establishment of a trust, or funds withheld. The amount of collateral we are required to provide typically represents a portion of the obligations we may owe the ceding company, often including estimates of unpaid losses made by the ceding company. Since we may be required to provide collateral based on the ceding company’s estimate, we may be obligated to provide collateral that exceeds our estimates of the ultimate liability to the ceding company. It is also unclear what, if any, the impact would be in the event of the liquidation of a ceding company with which we have a collateral arrangement. If these facilities are unavailable, not sufficient or if we are unable to arrange for other types of security on commercially acceptable terms, Maiden Bermuda’s ability to provide reinsurance to U.S. based clients may be severely limited. International Operations Our offices that operate in jurisdictions outside the Bermuda and U.S. are subject to certain limitations and risks that are unique to foreign operations. Our international operations are regulated in various jurisdictions with respect to licensing requirements, currency, security deposits, reserves and other matters. International operations may be harmed by political developments in foreign countries, which may be hard to predict in advance. Regulations governing technical reserves and remittance balances in some countries may hinder remittance of proﬁts and repatriation of assets. As a result of the IIS Acquisition, we have entered and will enter into a variety of global insurance and reinsurance markets that we have limited experience with and results may differ from our expectations, which could adversely affect our results of operations and ﬁnancial condition. The business associated with the IIS Acquisition and underwritten by Maiden Bermuda is primarily written in Germany, United Kingdom, Latin America, Australia and other global markets that we have limited experience with. We have retained the entire management team and staff of GMAC IIS and OVS to improve the likelihood that the IIS Acquisition will achieve its expected results. We expect the transaction to generally perform within its overall stated targets. In addition, we have secured an arrangement with the largest primary insurer in the IIS Acquisition portfolio to continue to reinsure business with us for a period of three years. Further we have entered into cooperation agreements with the dealer association and manufacturer in that country to increase sales penetration through these arrangements. Despite these measures, there can be no guarantee that the IIS Acquisition will achieve the targets anticipated, or that the transaction could result in losses that would adversely affect our results of operations and ﬁnancial condition. Foreign currency ﬂuctuations may reduce our net income and our capital levels adversely affecting our ﬁnancial condition. the Canadian dollar, We conduct business in a variety of non-U.S. currencies, the principal exposures being the Euro, the British pound, the Swedish krona and the Russian ruble. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. 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. Our principal exposure to foreign currency risk is our obligation to settle claims in 48 foreign currencies. In addition, we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than the U.S. dollar. While the Company may be able to match its foreign currency denominated assets against its net reinsurance liabilities both by currency and duration to protect the Company against foreign exchange and interest rate risks, a natural offset does not exist for all currencies. As of December 31, 2012, foreign currency denominated assets exceed foreign currency denominated liabilities for each of the individual non-U.S. currencies in which the Company transacts business. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results or equity may be reduced by ﬂuctuations in foreign currency exchange rates that could materially adversely affect our ﬁnancial condition and results of operations. At December 31, 2012, no such hedges or hedging strategies were in force or had been entered into. If the European common currency, the Euro, were to collapse, be devalued or undergo structural changes in its participating countries or the basis on which they participate, we could be impacted, potentially signiﬁcantly by the subsequent effects of such a circumstance. Further, we have exposure to the European sovereign debt crisis which could have a negative impact on our ﬁnancial condition and results of operations. We conduct a wide variety of business in countries in which the Euro is the local currency. We report our ﬁnancial results in U.S. dollars and use widely reported exchange rates to convert this currency into U.S. dollars. Countries whose currency is the Euro have experienced signiﬁcant economic uncertainty in recent years, which continues through the present time. These circumstances are the cumulative result of the effect of excessive sovereign debt, deﬁcits by numerous participating countries in the Euro, uncertainty regarding the monetary policies of the EU and their underlying funding mechanisms and poor economic growth and prospects for the EU as a whole. While economic policy measures and commitments did stabilize the currency’s volatility in the second half of 2012, the EU’s ﬁscal outlook remains negative, and permanent solutions to resolve these issues by participating countries and other institutions to stabilize the EU and improve its economic outlook have not been resolved. While not likely at this time, without satisfactory and timely resolution of these issues, the collapse or modiﬁcation of the Euro cannot be ruled out at this time, with further uncertainty as to what forms of currency would take its place. As a result, we could be exposed to signiﬁcantly greater foreign currency exposure than we estimate at this time. If the currency were impaired or disrupted to any signiﬁcant degree, it could also impact our ability to conduct normal business operations in those participating countries. Irrespective of the ultimate future of the currency, the impact of these efforts may cause a further deterioration in the value of the Euro and consequently exacerbate instability in global credit markets, and increase credit concerns resulting in the widening of bond yield spreads. In addition, recent rating agency downgrades on European sovereign debt and a growing concern of the potential default of government issuers has contributed to this uncertainty. The impact of these developments, while potentially severe, remains extremely difficult to predict. However, should European governments default on their obligations, there will be a negative impact on government and non-government issued bonds, government guaranteed corporate bonds and bonds and equities issued by ﬁnancial institutions and held within the country of default which in turn could adversely impact Euro-denominated assets held in our investment portfolio. For the year ended December 31, 2012, 9.4% of our net premiums written and 9.6% of our reserve for loss and loss adjustment expenses is Euro denominated. As of December 31, 2012 our ﬁxed income portfolio contains: (1) $38.8 million of Euro-denominated non-U.S. government bonds, which constitutes 1.5% of the ﬁxed income portfolio; and (2) $152.9 million of Euro-denominated non-U.S. corporate bonds, which constitutes 5.8% of the ﬁxed income portfolio. Of the Euro-denominated non-U.S. government bonds, 53.4% were from Germany and the Netherlands. We hold no sovereign bonds of Greece, Ireland, Italy, Portugal or Spain. 49 Regulation Compliance by our insurance subsidiaries with the legal and regulatory requirements to which they are subject is expensive. Any failure to comply could have a material adverse effect on our business. Our insurance subsidiaries are required to comply with a wide variety of laws and regulations applicable to insurance or reinsurance companies, both in the jurisdictions in which they are organized and where they sell their insurance and reinsurance products. The insurance and regulatory environment, in particular for offshore insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the U.S., various states within the U.S. and the EU. In the past, there have been Congressional and other initiatives in the U.S. regarding increased supervision and regulation of the insurance industry. It is not possible to predict the future impact of changes in laws and regulations on our operations. The cost of complying with any new legal requirements affecting our subsidiaries could have a material adverse effect on our business. In addition, our subsidiaries may not always be able to obtain or maintain necessary licenses, permits, authorizations or accreditations. They also may not be able to fully comply with, or to obtain appropriate exemptions from, the laws and regulations applicable to them. Any failure to comply with applicable law or to obtain appropriate exemptions could result in restrictions on either the ability of the company in question, as well as potentially its affiliates, to do business in one or more of the jurisdictions in which they operate or on brokers on which we rely to produce business for us. In addition, any such failure to comply with applicable laws or to obtain appropriate exemptions could result in the imposition of ﬁnes or other sanctions. Any of these sanctions could have a material adverse effect on our business. Insurance statutes and regulations in jurisdictions outside and inside the U.S. could affect our proﬁtability and restrict our ability to operate. Maiden Bermuda is licensed as a Bermuda insurance company and is subject to regulation and supervision in Bermuda. The applicable Bermuda statutes and regulations generally are designed to protect insureds and ceding insurance companies, not our shareholders. We do not intend Maiden Bermuda to be registered or licensed as an insurance company in any jurisdiction outside Bermuda or to conduct any insurance or reinsurance activities in the U.S. or elsewhere outside of Bermuda. Nevertheless, we expect that a large portion of the gross premiums written by Maiden Bermuda will be derived from (1) the Reinsurance Agreement with AII, (2) the quota share agreement with ACAC, and (3) from reinsurance contracts entered into with entities mostly domiciled in the U.S. and Europe. Inquiries into or challenges to the insurance activities of Maiden Bermuda may still be raised by U.S. or European insurance regulators in the future. In addition, even if Maiden Bermuda, as a reinsurer, is not directly regulated by applicable laws and regulations governing insurance in the jurisdictions where its ceding companies operate, these laws and regulations, and changes in them, can affect the proﬁtability of the business that is ceded to Maiden Bermuda, and thereby affect our results of operations. The laws and regulations applicable to direct insurers could indirectly affect us in other ways as well, such as collateral requirements in various U.S. states to enable such insurers to receive credit for reinsurance ceded to us. In the past, there have been Congressional and other proposals in the U.S. regarding increased supervision and regulation of the insurance industry, including proposals to supervise and regulate reinsurers domiciled outside the U.S. Our exposure to potential regulatory initiatives could be heightened by the fact that Maiden Bermuda is intended to be domiciled in, and operate exclusively from, Bermuda. Bermuda is a small jurisdiction and may be disadvantaged when participating in global or cross-border regulatory matters compared with larger jurisdictions such as the U.S. or the leading EU countries. This disadvantage could be ampliﬁed by the fact that Bermuda, which is currently an overseas territory of the United Kingdom, may consider changes including potentially seeking independence. relationship with the United Kingdom in the future, to its If Maiden Bermuda were to become subject to any insurance laws and regulations of the U.S. or any U.S. state, which are generally more restrictive than Bermuda laws and regulations, at any time in the future, it might be required to post deposits or maintain minimum surplus levels and might be prohibited from 50 engaging in lines of business or from writing speciﬁed types of policies or contracts. Complying with those laws could have a material adverse effect on our ability to conduct business and on our ﬁnancial condition and results of operations. In recent years, the state insurance regulatory framework in the U.S. has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance and reinsurance companies and insurance holding companies. Further, the NAIC and speciﬁcally focusing on state insurance regulators are re-examining existing laws and regulations, modiﬁcations to holding company regulations, interpretations of existing laws and the development of new laws. Any proposed or future legislation or NAIC initiatives may be more restrictive than current regulatory requirements or may result in higher costs. In 2008, the BMA introduced new risk-based capital standards for insurance companies as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The amended Bermuda insurance statutes and regulations pursuant to the new risk-based supervisory approach required additional ﬁlings by insurers to be made to the BMA. The required statutory capital and surplus of our Bermuda-based operating subsidiary increased under the BSCR. While our Bermuda-based operating subsidiary currently has excess capital and surplus under these new requirements, there can be no assurance that such requirement or similar regulations, in their current form or as may be amended in the future, will not have a material adverse effect on our business, ﬁnancial condition or results of operations. Europe Within the EU, the EU Reinsurance Directive of November 2005 (the ‘‘Directive’’) was adopted. Member States of the EU and the European Economic Area (‘‘EEA’’) were required to implement this by December 2007, however several Member States were late in the implementation of the Directive and, in a few cases, further legislation is still necessary. The Directive requires member countries to lift barriers to trade within the EU for companies that are domiciled in an EU country, therefore, allowing reinsurers established in the EU to provide services to all EEA states. As a result, Maiden LF, being established in Sweden and regulated by the Swedish Finansinspektionen (‘‘Swedish FSA’’), is able, subject to regulatory notiﬁcations and there being no objection from the Swedish FSA and the Member States concerned, to provide insurance and reinsurance services in all EEA Member States. The Directive also does not prohibit EEA insurers from obtaining reinsurance from reinsurers licensed outside the EEA. As such, and subject to the speciﬁc rules in particular Member States, Maiden Bermuda may do business from Bermuda with insurers in EEA Member States, but it may not directly operate its reinsurance business within the EEA. Currently, each individual EEA Member State may impose conditions on reinsurance provided by Bermuda based reinsurers which could restrict their future provision of reinsurance to the EEA Member State concerned. A number of EEA Member States currently restrict the extent to which Bermudian reinsurers may promote their services in those Member States, and a few have certain prohibitions on the purchase of insurance from reinsurers not authorized in the EEA. In addition to the Directive, the EU is introducing a new regulatory regime for the regulation of the insurance and reinsurance sector known as ‘‘Solvency II’’. Solvency II is a principles-based regulatory regime which seeks to promote ﬁnancial stability, enhance transparency and facilitate harmonization among insurance and reinsurance companies within the EC. Solvency II employs a risk-based approach to setting capital requirements for insurers and reinsurers. One aspect of Solvency II (the details of which are currently being developed) concerns the treatment of reinsurance ceded by EC insurers to reinsurers headquartered in a state outside the EC. For example, consideration is being given as to whether reinsurance ceded to a non-EC reinsurer should be treated in the same way as reinsurance ceded to an EC reinsurer, and whether EC decants should require their non-EC reinsurers to provide collateral to cover unearned premium and outstanding claims provisions. The Solvency II directive proposes that EC and non-EC reinsurers shall be treated in the same way provided that the non-EC jurisdiction is found to have a regulatory regime ‘‘equivalent’’ to that of Solvency II. Our reinsurance subsidiaries are headquartered in non-EC countries. If the regulatory regimes of such countries are found not to be equivalent to that of Solvency II and if our reinsurance subsidiaries fall below a certain minimum credit rating, then cedants in the EC may be prevented from recognizing the reinsurance provided to them by our reinsurance subsidiaries for the purpose of meeting their capital 51 requirements or we may be required to provide collateral for our obligations to EC insurers. This could have a material adverse impact on our ability to conduct our business. There remains uncertainty whether Solvency II will be fully implemented by the end of 2013. United States In the U.S., licensed reinsurers are highly regulated and must comply with ﬁnancial supervision standards comparable to those governing primary insurers. For additional discussion of the regulatory requirements to which Maiden Holdings, as a holding company, and its subsidiaries are subject, see Item 1 ‘‘Business — Regulatory Matters’’ in this Form 10-K. Any failure to comply with applicable laws could result in the imposition of signiﬁcant restrictions on our ability to do business, and could also result in ﬁnes and other sanctions, any or all of which could materially adversely affect our ﬁnancial condition and results of operations. In addition, these statutes and regulations may, in effect, restrict the ability of our subsidiaries to write new business or, as indicated below, distribute funds to Maiden Holdings. In recent years, some U.S. state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. the NAIC and state insurance regulators regularly re-examine existing laws and regulations and Moreover, interpretations of existing laws and develop new laws. The new interpretations or laws may be more restrictive or may result in higher costs to us than current statutory requirements. the reinsurance industry, In addition, the federal government has undertaken initiatives, including Dodd-Frank, in several areas that may impact including tort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank Act became effective on July 21, 2011. In addition to introducing sweeping reform of the U.S. ﬁnancial services industry, the Dodd-Frank Act has changed the regulation of reinsurance in the U.S. The Dodd-Frank Act prohibits a state from denying credit for reinsurance if the state of domicile of the insurer purchasing the reinsurance recognizes credit for reinsurance. At present, it appears the changes speciﬁc to reinsurance in the Dodd-Frank Act will not have a material adverse effect for non-U.S. reinsurers such as us, however, there is still signiﬁcant uncertainty as to how these and other provisions of the Dodd-Frank Act will be implemented in practice. Applicable insurance laws regarding the change of control of acquisition of our shares. insurance companies may limit the Under Bermuda law, for so long as Maiden Holdings has an insurance subsidiary registered under the Insurance Act, the BMA may at any time, by written notice, object to a person holding 10% or more of its common shares if it appears to the BMA that the person is not or is no longer ﬁt and proper to be such a holder. In such a case, the BMA may require the shareholder to reduce its holding of common shares in that such shareholder’s voting rights attaching to the Maiden Holdings and direct, among other things, common shares shall not be exercisable. A person who does not comply with such a notice or direction from the BMA will be guilty of an offense. This may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable. In addition to the foregoing, we are subject to U.S. state statutes governing insurance holding companies, which generally require that any person or entity desiring to acquire direct or indirect control of any of our U.S. insurance company subsidiaries obtain prior regulatory approval. ‘‘Control’’ is generally deﬁned as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Under the laws of most U.S. states, any beneﬁcial owner of 10% or more of the outstanding voting securities of an insurance company or its holding company is presumed to have acquired control, unless this presumption is rebutted. These laws may also discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable. Any person having a shareholding of 10% or more of the issued share capital in Maiden Holdings would be considered to have an indirect holding in our U.S. insurance subsidiaries at or over the 10% limit. Any 52 change that resulted in the indirect acquisition or disposal of a shareholding of greater than or equal to 10% in the share capital of Maiden Holdings may require approval of the relevant U.S. state insurance regulators prior to the transaction. Changes in accounting principles and ﬁnancial reporting requirements could result in material changes to our reported results and ﬁnancial condition. U.S. GAAP and related ﬁnancial reporting requirements are complex, continually evolving and may be subject to varied interpretation by the relevant authoritative bodies. Such varied interpretations could result from differing views related to speciﬁc facts and circumstances. Changes in U.S. GAAP and ﬁnancial reporting requirements, or in the interpretation of U.S. GAAP or those requirements, could result in material changes to our reported results and ﬁnancial condition. Moreover, the SEC is currently evaluating IFRS to determine whether IFRS should be incorporated into the ﬁnancial reporting system for U.S. issuers. Certain of these standards could result in material changes to our reported results of operation. Employee Issues We are dependent on our key executives. We may not be able to attract and retain key employees or successfully formulated business strategy. our new management our newly implement team to integrate fully Our success depends largely on our senior management, which includes, among others, Art Raschbaum, our President and Chief Executive Officer, John Marshaleck, our Chief Financial Officer, Karen Schmitt, our President of Maiden US and Maiden Specialty, Patrick J. Haveron, our Executive Vice President, and Ronald M. Judd, our President of Maiden Global. We have entered into employment agreements with each of these executive officers, as well as with additional former key employees of GMAC RE and GMAC IIS. These employees were instrumental in developing the book of business with the former GMAC RE and GMAC IIS and have been managing the retention of that business as it has transferred to Maiden US, Maiden Specialty or Maiden Bermuda. Our inability to attract and retain additional personnel or the loss of the services of any of our senior executives or key employees could delay or prevent us from fully implementing our business strategy and could signiﬁcantly and negatively affect our business. Our business in Bermuda could be adversely affected by Bermuda employment restrictions. Currently, we employ twelve non-Bermudians in our Bermuda office including our President and Chief Executive Officer, our Chief Financial Officer and our Chief Underwriting Officer. We may hire additional non-Bermudians as our business grows. Under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent residents’ certiﬁcates and holders of working residents’ certiﬁcates) may not engage in any gainful occupation in Bermuda without a valid government work permit. A work permit may be granted or renewed upon showing that, after proper public advertisement, no Bermudian, spouse of a Bermudian, or holder of a permanent resident’s or working resident’s certiﬁcate who meets the minimum standards reasonably required by the employer has applied for the job. The Bermuda government’s policy to certain exemptions for key places a six year term limit on individuals with work permits, subject employees. A work permit is issued with an expiry date (up to ﬁve years) and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. We may not be able to use the services of one or more of our non-Bermudian employees if we are not able to obtain work permits for them, which could have a material adverse effect on our business, ﬁnancial condition and results of operations. Corporate Governance Our holding company structure and certain regulatory and other constraints affect our ability to pay dividends and make other payments. Maiden Holdings is a holding company. As a result, we do not have, and will not have, any signiﬁcant operations or assets other than our ownership of the shares of our subsidiaries. We expect that dividends and other permitted distributions from Maiden Bermuda, Maiden Global (and its subsidiaries), Maiden LF and Maiden NA (and its subsidiaries) will be our sole source of funds to pay 53 dividends to common and preference shareholders and meet ongoing cash requirements, including debt service payments, if any, and other expenses. Bermuda law and regulations, including, but not limited to, Bermuda insurance regulations, will restrict the declaration and payment of dividends and the making of distributions by Maiden Bermuda, unless speciﬁc regulatory requirements are met. In addition, Maiden Bermuda might enter into contractual arrangements in the future that could impose restrictions on any such payments. If we cannot receive dividends or other permitted distributions from Maiden Bermuda as a result of such restrictions, we will be unable to pay dividends on our common shares and preference shares as currently contemplated by our board of directors. is anticipated Maiden Bermuda can pay us dividends of approximately $217.7 million. The inability of Maiden Bermuda to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our business, ﬁnancial condition and results of operations. It We are subject to Bermuda regulatory constraints that will affect our ability to pay dividends on our shares and make other payments. Under the Companies Act, we may declare or pay a dividend out of distributable reserves only if we have reasonable grounds for believing that we are, or would after the payment be, able to pay our liabilities as they become due and if the realizable value of our assets would thereby not be less than the aggregate of our liabilities and issued share capital and share premium accounts. The ability of Maiden US and Maiden Specialty to pay dividends is regulated, and under certain circumstances, restricted, pursuant to applicable law. If Maiden US and Maiden Specialty cannot pay dividends to Maiden NA, Maiden NA may not, in turn, be able to pay dividends to Maiden Holdings, which may not, in turn, be able to pay dividends to shareholders. As of December 31, 2012, Maiden US could pay dividends to Maiden NA of approximately $0 and Maiden Specialty could pay dividends to Maiden US of $4.6 million without prior regulatory approval. Any dividends paid by Maiden US and Maiden Specialty would reduce its surplus. Under the Insurance Act, Maiden Bermuda is required to prepare Statutory Financial Statements and to ﬁle a Statutory Financial Return in Bermuda. The Insurance Act also requires Maiden Bermuda to maintain a minimum share capital of $120. To satisfy these requirements, the statutory capital and surplus of Maiden Bermuda at December 31, 2012 was approximately $942.8 million (2011 − $693.4 million) and the amount required to be maintained under Bermuda law, the Minimum Solvency Margin, was $231.1 million (2011 − $226.5 million) at December 31, 2012. Maiden Bermuda was also required to maintain a minimum liquidity ratio. All requirements were met by Maiden Bermuda throughout the period. In addition, Maiden Bermuda is subject to statutory and regulatory restrictions under the Insurance Act that limit the maximum amount of annual dividends or distributions to be paid by Maiden Bermuda to Maiden Holdings without notiﬁcation to the BMA of such payment (and in certain cases prior approval of the BMA). Maiden Bermuda is allowed to pay dividends provided the payment of the dividends does not result in Maiden Bermuda failing to comply with the ECR as calculated by the BSCR. Maiden Bermuda is currently completing its 2012 BSCR and as of December 31, 2012, it is anticipated Maiden Bermuda can pay dividends or distributions not exceeding $217.7 million. Maiden Bermuda is registered as a Class 3B reinsurer under the Insurance Act and therefore must maintain capital at a level equal to its ECR which is established by reference to the BSCR model. The BSCR employs a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The regulatory requirements are designed to have insurers operate at or above a threshold capital level, which exceeds the BSCR. While not speciﬁcally referred to in the Insurance Act, the BMA has established a TCL for each Class 3B insurer equal to 120% of its ECR. While a Class 3B insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. Maiden Bermuda is currently completing its 2012 BSCR and believes that it will meet the ECR as of December 31, 2012. 54 A few signiﬁcant shareholders may inﬂuence or control the direction of our business. If the ownership of our common shares continues to be highly concentrated, it may limit your ability and the ability of other shareholders to inﬂuence signiﬁcant corporate decisions. The interests of our Founding Shareholders may not be fully aligned with your interests, and this may lead to a strategy that is not in your best interest. As of February 25, 2013. our Founding Shareholders beneﬁcially control approximately 28.4% of our outstanding common shares. Although they do not act as a group, our Founding Shareholders exercise signiﬁcant inﬂuence over matters requiring shareholder approval, and their concentrated holdings may delay or deter possible changes in control of Maiden Holdings, which may reduce the market price of our common shares. We currently intend to pay a quarterly cash dividend of $0.09 per common share; however, any determination to pay dividends will be at the discretion of our board of directors. Our board of directors currently intends to authorize the payment of a cash dividend of $0.09 per common share each quarter. Any determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our results of operations and cash ﬂows, our ﬁnancial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant, including Bermuda legal and regulatory constraints. Payment of dividends to common shareholders is also predicated on the payment of dividends to holders of Series A Preference Shares before any such common dividend can be paid. If required dividend payments on the Series A Preference Shares are not made, dividends to common shareholders may not be made until such time that Series A Preference Share dividend payments resume. Dividends on the Series A Preference Shares are non-cumulative. Dividends on the Series A Preference Shares are non-cumulative and payable only out of lawfully available funds of Maiden under Bermuda law. Consequently, if Maiden’s Board of Directors (or a duly authorized committee of the Board) does not authorize and declare a dividend for any dividend period with respect to the Series A Preference Shares, holders of the Series A Preference Shares would not be entitled to receive any such dividend, and such unpaid dividend will not accumulate and will never be payable. Maiden will have no obligation to pay dividends for a dividend period on or after the dividend payment date for such period if its Board of Directors (or a duly authorized committee of the Board) has not declared such dividend before the related dividend payment date. If dividends on the Series A Preference Shares are authorized and declared with respect to any subsequent dividend period, Maiden will be free to pay dividends on any other series of preference shares and/or our common shares. Our revenues and results of operations may ﬂuctuate as a result of factors beyond our control, which may cause the price of our shares to be volatile. The revenues and results of operations of reinsurance companies historically have been subject to signiﬁcant ﬂuctuations and uncertainties. Our proﬁtability can be affected signiﬁcantly by: • • • • • • • • ﬂuctuations in interest rates, inﬂationary pressures and other changes in the investment environment that affect returns on invested assets; changes in the frequency or severity of claims; volatile and unpredictable developments, catastrophes or terrorist attacks; price competition; including man-made, weather-related and other natural inadequate loss and loss adjustment expense reserves; cyclical nature of the property and casualty insurance market; negative developments in the specialty property and casualty reinsurance sectors in which we operate; and reduction in the business activities of AmTrust, ACAC or any of our ceding insurers. 55 If our revenues and results of operations ﬂuctuate as a result of one or more of these factors, the price of our shares may be volatile. Future sales of shares may adversely affect their price. Future sales of our common shares by our shareholders or us, or the perception that such sales may occur, could adversely affect the market price of our common shares. As of February 25, 2013, 72,421,951 common shares were outstanding. In addition, we have reserved 10,000,000 common shares for issuance under our Amended and Restated 2007 Share Incentive Plan. As of February 25, 2013, the total options outstanding was 2,717,433. Sales of substantial amounts of our shares, or the perception that such sales could occur, could adversely affect the prevailing price of the shares and may make it more difficult for us to sell our equity securities in the future, or for shareholders to sell their shares, at a time and price that they deem appropriate. We are subject to additional ﬁnancial and other reporting and corporate governance requirements that may be difficult for us to satisfy. We are subject to ﬁnancial and other reporting and corporate governance requirements, including the requirements of the NASDAQ Global Market, the New York Stock Exchange and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which impose signiﬁcant compliance obligations upon us. In particular, we are, or will be, required to: • • • • • • • enhance the roles and duties of our board of directors, our board committees and management; supplement our internal accounting function, including hiring staff with expertise in accounting and ﬁnancial reporting for a public company, as well as implement appropriate and sufficient accounting and reporting systems, and enhance and formalize closing procedures at the end of our accounting periods; prepare and distribute periodic public reports in compliance with our obligations under the U.S. federal securities laws; involve and retain to a greater degree outside counsel and accountants in the activities listed above; establish or outsource an internal audit function; enhance our investor relations function; and establish new control policies, such as those relating to disclosure controls and procedures, segregation of duties and procedures and insider trading. These obligations require a signiﬁcant commitment of additional resources. We may not be successful in implementing these requirements, and implementing or maintaining them could adversely affect our business or operating results. In addition, if we fail to implement or maintain the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis would be impaired. Provisions in our bye-laws may reduce or increase the voting rights of our shares. In general, and except as provided under our bye-laws and as provided below, the common shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, if, and so long as, the shares of a shareholder are treated as ‘‘controlled shares’’ (as determined pursuant to Sections 957 and 958 of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’)) of any U.S. Person (as that term is deﬁned in the risk factors under the section captioned ‘‘Taxation’’ within this Item on page 62 (that owns shares directly or indirectly through non-U.S. entities) and such controlled shares constitute 9.5% or more of the votes conferred by our issued shares, the voting rights with respect to the controlled shares owned by such U.S. Person will be limited, in the aggregate, to a voting power of less than 9.5%, under a formula speciﬁed in our bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. In addition, our board may limit a shareholder’s voting rights when it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any direct or indirect shareholder or its affiliates. ‘‘Controlled shares’’ include, among 56 other things, all shares that a U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). The amount of any reduction of votes that occurs by operation of the above limitations will generally be reallocated proportionately among our other shareholders whose shares were not ‘‘controlled shares’’ of the 9.5% U.S. Shareholder so long as such reallocation does not cause any person to become a 9.5% U.S. Shareholder. Under these provisions, certain shareholders may have their voting rights limited, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. We are authorized under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If any holder fails to respond to this request or submits incomplete or inaccurate information, we may, in our sole discretion, eliminate the shareholder’s voting rights. Anti-takeover provisions in our bye-laws could impede an attempt to replace or remove our directors, which could diminish the value of our common shares. Our bye-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneﬁcial to do so. In addition, these provisions could delay or prevent a change of control these provisions may prevent a shareholder from receiving the beneﬁt from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging changes in management and takeover attempts in the future. that a shareholder might consider favorable. For example, Examples of provisions in our bye-laws that could have such an effect include the following: • • our board of directors may reduce the total voting power of any shareholder in order to avoid adverse tax, legal or regulatory consequences to us or any direct or indirect holder of our shares or its affiliates; and our directors may, in their discretion, decline to record the transfer of any common shares on our share register, if they are not satisﬁed that all required regulatory approvals for such transfer have been obtained or if they determine such transfer may result in a non-de minimis adverse tax, legal or regulatory consequence to us or any direct or indirect holder of shares or its affiliates. It may be difficult for a third party to acquire us. Provisions of our organizational documents may discourage, delay or prevent a merger, amalgamation, tender offer or other change of control that holders of our shares may consider favorable. These provisions impose various procedural and other requirements that could make it more difficult for shareholders to effect various corporate actions. These provisions could: • • • • have the effect of delaying, deferring or preventing a change in control of us; discourage bids for our securities at a premium over the market price; adversely affect the price of, and the voting and other rights of the holders of our securities; or impede the ability of the holders of our securities to change our management. In addition, AII and ACAC are entitled to terminate their respective quota share agreements if we undergo a change in control. Because we expect the business we reinsure from AmTrust and ACAC to constitute a substantial portion of our business, this termination right may deter parties who are interested in acquiring us, may prevent shareholders from receiving a premium over the market price of our common shares and may depress the price of our common shares below levels that might otherwise prevail. 57 U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation. The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. As a result of these differences, U.S. persons who own our shares may have more difficulty protecting their interests than U.S. persons who own shares of a U.S. corporation. Set forth below is a summary of certain signiﬁcant provisions of the Companies Act, including modiﬁcations adopted pursuant to our bye-laws, applicable to us which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders. Interested Directors. Bermuda law provides that if a director has a personal interest in a transaction to which the company is also a party and if the director discloses the nature of this personal interest at the ﬁrst opportunity, either at a meeting of directors or in writing to the directors, then the company will not be able to declare the transaction void solely due to the existence of that personal interest and the director will not be liable to the company for any proﬁt realized from the transaction. In addition, Bermuda law and our bye-laws provide that, after a director has made the declaration of interest referred to above, he is allowed to be counted for purposes of determining whether a quorum is present and to vote on a transaction in which he has an interest, unless disqualiﬁed from doing so by the chairman of the relevant board meeting. Under Delaware law such transaction would not be voidable if: • • • • the material facts as to such interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors; such material facts are disclosed or are known to the shareholders entitled; to vote on such transaction and the transaction is speciﬁcally approved in good faith by vote of the majority of shares entitled to vote thereon; or the transaction is fair as to the corporation as of the time it is authorized, approved or ratiﬁed. Under Delaware law, such interested director could be held liable for a transaction in which such director derived an improper personal beneﬁt. Mergers and Similar Arrangements. The amalgamation of a Bermuda company with another company or corporation (other than certain affiliated companies) requires the amalgamation agreement to be approved by the company’s board of directors and by its shareholders. Under our bye-laws, we may, with the approval of a majority of votes cast at a general meeting of our shareholders at which a quorum is present, amalgamate In the case of an with another Bermuda company or with a body incorporated outside Bermuda. amalgamation, a shareholder may apply to a Bermuda court for a proper valuation of such shareholder’s shares if such shareholder is not satisﬁed that fair value has been paid for such shares. Under Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration such shareholder would otherwise receive in the transaction. Shareholders’ Suit. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy a wrong done to the company where the act complained of is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such 58 an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the company, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of ﬁduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action. Indemniﬁcation of Directors. We may indemnify our directors or officers in their capacity as directors or officers of any loss arising or liability attaching to them by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which a director or officer may be guilty in relation to the company other than in respect of his own fraud or dishonesty. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, ﬁnes and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if such director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful. In addition, we have entered into indemniﬁcation agreements with our directors and officers. We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers. We are incorporated under the laws of Bermuda and our business is based in Bermuda. In addition, most of our directors and officers reside outside Bermuda and a substantial portion of our assets will be and the assets of these persons are, and will continue to be, located in jurisdictions outside Bermuda. As such, it may be difficult or impossible to effect service of process within the U.S. upon us or those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the ﬁrst instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law. We have been previously advised by Conyers Dill & Pearman, our Bermuda counsel, that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, as well as the experts named in this Report, predicated upon the civil liability provisions of the U.S. federal securities laws or original actions brought in Bermuda against us or these persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Conyers Dill & Pearman that there is no treaty in effect between the U.S. and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to that jurisdiction’s public policy. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments. Our internal control and reporting systems might not be effective in the future, which could increase the risk that we would become subject to restatements of our ﬁnancial results or to regulatory action or litigation or other developments that could adversely affect our business. Our ability to produce accurate ﬁnancial statements and comply with applicable laws, rules and regulations is largely dependent on our maintenance of internal control and reporting systems, as well as on our ability to attract and retain qualiﬁed management and accounting and actuarial personnel to further develop our internal accounting function and control policies. If we fail to effectively establish and maintain such reporting and accounting systems or fail to attract and retain personnel who are capable of designing and operating such systems, these failures will increase the likelihood that we may be required to restate our ﬁnancial results to correct errors or that we will become subject to legal and regulatory infractions, which may 59 litigation and investigations by regulatory agencies including the SEC. In addition, entail civil if our management or our independent registered public accounting ﬁrm were to conclude that our internal control reported ﬁnancial over ﬁnancial information, and our ﬁnancial ﬂexibility and the value of our common shares could be adversely impacted. investors could lose conﬁdence in our reporting was not effective, Relationship with AmTrust and ACAC We are dependent on AmTrust and its subsidiaries for a substantial portion of our business. AmTrust is Maiden’s largest client relationship and we will continue to derive a substantial portion of our business from AmTrust in the near term. We commenced our reinsurance business by providing traditional quota share reinsurance to AmTrust through the Reinsurance Agreement with AmTrust’s Bermuda reinsurance subsidiary AII, assuming initially a 40% quota share portion of the net liabilities less recoveries of the policies written by AmTrust. In 2011, we provided additional quota share reinsurance through the European Hospital Liability Quota Share which is a separate one-year 40% quota share agreement with AmTrust Europe Limited and AmTrust International Underwriters Limited. The European Hospital Liability Quota Share covers those entities medical liability business in Europe, all of which is in Italy and France at the present time. We are still dependent, however, on AmTrust and its subsidiaries for a substantial portion of our business and underwriting income. Our Reinsurance Agreement with AII has been renewed for an additional three years (until June 30, 2014), subject to certain early termination provisions (including if the A.M. Best rating of Maiden Bermuda is reduced below ‘‘A-’’). The Reinsurance Agreement will be extended for additional terms of three years unless either party elects not to renew. There is no assurance that this agreement will not terminate. The termination of the Reinsurance Agreement would signiﬁcantly reduce our revenues and could have a material adverse effect on us. At the same time, there are risks related to the business of AmTrust and its insurance subsidiaries that may adversely impact our ability to continue doing business with them. In addition, we are not able to control the types or amounts of reinsurance AmTrust purchases from unaffiliated reinsurers, and any changes AmTrust makes to such reinsurance may affect our proﬁtability and ability to write additional business. Our initial arrangements with AmTrust were negotiated while we were its affiliate. The arrangements could be challenged as not reﬂecting terms that we would agree to in arm’s-length negotiations with an independent third party; moreover, our business relationship with AmTrust and its subsidiaries may present, and may make us vulnerable to, possible adverse tax consequences, difficult conﬂicts of interest, and legal claims that we have not acted in the best interest of our shareholders. We entered into a quota share agreement with AII, which reinsures AmTrust’s insurance company subsidiaries, and a Master Agreement with AmTrust, pursuant to which we and AmTrust agreed that we will cause Maiden Bermuda to enter into the quota share agreement. The asset management agreement with an AmTrust subsidiary, the reinsurance brokerage agreement with an AmTrust subsidiary, the warrants previously issued to our Founding Shareholders (which were exchanged for restricted common shares in September 2010) and the expired provisional employment agreement with our former Chief Executive Officer, Max G. Caviet, were negotiated while we were an affiliate of AmTrust. These circumstances could increase the likelihood that the IRS would claim that the agreements between us and AmTrust were not executed on an arm’s-length basis and any such assertion, if not disproved by us, could result in adverse tax consequences to us. Because (i) our Founding Shareholders collectively own or control approximately 59% of the outstanding shares of AmTrust’s common stock, (ii) our Founding Shareholders sponsored our formation, and (iii) our Founding Shareholders’ common shares represent approximately 28.3% of our outstanding common shares; we therefore may be deemed an affiliate of AmTrust. Due to our close business relationship with AmTrust, we may be presented with situations involving conﬂicts of interest with respect to the agreements and other arrangements we will enter into with AmTrust and its subsidiaries, exposing us to possible claims that we have not acted in the best interest of our shareholders. The arrangements between us and AmTrust were modiﬁed somewhat after they were originally entered into and there could be future modiﬁcations. 60 Our non-executive Chairman of the Board currently holds the positions of President, Chief Executive Officer and director of AmTrust, and our former Chief Executive Officer and director is currently employed by AmTrust as an executive officer. These dual positions may present, and make us vulnerable to, difficult conﬂicts of interest and related legal challenges. Barry D. Zyskind, our non-executive Chairman of the Board, is the President, Chief Executive Officer and director of AmTrust and, as such, he does not serve our Company on a full-time basis. Mr. Zyskind is expected to continue in both of his positions for the foreseeable future. In addition, Max G. Caviet, our former Chief Executive Officer and director, is currently employed by AmTrust as an executive officer. Conﬂicts of interest could arise with respect to business opportunities that could be advantageous to AmTrust or its subsidiaries, on the one hand, and us or our subsidiary, on the other hand. In addition, potential conﬂicts of interest may arise should the interests of Maiden Holdings and AmTrust diverge. Because AmTrust was our only signiﬁcant customer until November 2008, remains our largest customer, and is expected to remain our largest customer for at least the next several years, AmTrust could have the ability to signiﬁcantly inﬂuence the Audit Committee of our Board of Directors, which consists entirely of such situations. However, those related to independent directors, does review and approve all compensation, which our independent Compensation Committee reviews. related party transactions, except One of our Founding Shareholders owns the majority of the common stock of ACAC, and AmTrust has an investment in ACAC. This may present, and make us vulnerable to, difficult conﬂicts of interest and related legal challenges. In November 2009, we announced an agreement in principal with ACAC regarding a multi-year 25% quota share agreement expected to generate over $200 million in annual revenue. The contract commenced on March 1, 2010 after ﬁnal regulatory approval and the closing of ACAC’s acquisition of GMACI’s U.S. consumer property and casualty insurance business, as well as a small amount of commercial auto business. ACAC is owned by one of our Founding Shareholders, Michael Karfunkel, and the Michael Karfunkel 2005 Grantor Retained Annuity Trust (the ‘‘Trust’’), which is controlled by Leah Karfunkel, wife of Michael Karfunkel. The Trust currently owns 72.4% of ACAC’s issued and outstanding common stock, Michael Karfunkel currently owns 27.6% of ACAC’s issued and outstanding common stock and AmTrust owns preferred shares convertible into 21.25% of the issued and outstanding common stock of ACAC. Conﬂicts of interest could arise with respect to business opportunities that could be advantageous to ACAC or its subsidiaries, on the one hand, and disadvantageous to us or our subsidiary, on the other hand. In addition, potential conﬂicts of interest may arise should the interests of Maiden Holdings and ACAC diverge. Because it is anticipated that ACAC will be a signiﬁcant customer for at least the next several years, one of our Founding Shareholders could have the ability to signiﬁcantly inﬂuence such situations. However, the Audit Committee of the Company’s Board of Directors, which consists entirely of independent directors, does review and approve all related party transactions, except those related to compensation, which our independent Compensation Committee reviews. Our funds will be loaned to AII to be placed in trusts for the beneﬁt of AmTrust’s insurance companies or will be placed in trusts for the beneﬁt of other ceding companies. Maiden Bermuda has agreed to collateralize its obligations under the Reinsurance Agreement by one or more of the following methods at the election of Maiden Bermuda: • • • by lending funds (which may include cash or investments) on an unsecured basis to AII pursuant to a loan agreement between Maiden Bermuda and AII with such funds being deposited by AII into the the sole beneﬁt of AmTrust’s trust accounts established or U.S. to the reinsurance agreements between AII and those AmTrust subsidiaries; insurance subsidiaries pursuant to be established by AII for by transferring to AII assets for deposit into those trust accounts; by delivering letters of credit of AII; or to the applicable U.S. AmTrust insurance subsidiaries on behalf 61 • by requesting that AII cause such AmTrust insurance subsidiary to withhold premiums in lieu of remitting such premiums to AII. As a result of our use of Regulation 114 trusts accounts or letters of credit and our election to lend funds to AII, a substantial portion of our assets will not be available to us for other uses, which could reduce our ﬁnancial ﬂexibility. If collateral is required to be provided to any other AmTrust insurance company subsidiaries under applicable law or regulatory requirements, Maiden Bermuda will provide collateral to the extent required, although Maiden Bermuda does not expect that such collateral will be required unless an AmTrust insurance company subsidiary is domiciled in the U.S. Maiden Bermuda currently is satisfying its collateral requirements under the Master Agreement by lending funds (which may include cash or investments) on an unsecured basis to AII pursuant to a loan agreement. As of December 31, 2012, $168.0 million was on loan to AII. Maiden Bermuda is not a party to the reinsurance agreements between AII and AmTrust’s U.S. insurance subsidiaries or the related reinsurance trust agreements and has no rights there under. If one or more of these AmTrust subsidiaries withdraws Maiden Bermuda’s assets from their trust account, draws down on its letter of credit or misapplies withheld funds that are due to Maiden and that subsidiary is or becomes insolvent, we believe it may be more difficult for Maiden Bermuda to recover any such amounts to which we are entitled than it would be if Maiden Bermuda had entered into reinsurance and trust agreements with these AmTrust subsidiaries directly. AII has agreed to immediately return to Maiden Bermuda any collateral provided by Maiden Bermuda that one of those subsidiaries improperly utilizes or retains, and AmTrust has agreed to guarantee AII’s repayment obligation and AII’s payment obligations under its loan agreement with Maiden Bermuda. We are subject to the risk that AII and/or AmTrust may be unable or unwilling to discharge these obligations. In addition, if AII experiences a change in control and Maiden Bermuda chooses not to terminate the Reinsurance Agreement, AmTrust’s guarantee obligations will terminate immediately and automatically. We will not be able to control AmTrust’s or ACAC’s decisions relating to its other reinsurance, and AmTrust and/or ACAC may change its reinsurance in ways that could adversely affect us. The reinsurance ceded by AmTrust and ACAC is net of any reinsurance that AmTrust and ACAC obtain from unaffiliated reinsurers. For example, Maiden Bermuda will receive 40% of AmTrust’s premiums (net of commissions in the case of AmTrust’s U.K. subsidiary) net of premiums ceded to unaffiliated reinsurers, and will be liable for 40% of losses and loss adjustment expenses on the ceded business net of any reinsurance recoverable (whether collectible or not) from unaffiliated reinsurers. We are not able to control the types or amounts of reinsurance that AmTrust or ACAC purchases from unaffiliated reinsurers. If AmTrust and/or ACAC chose to purchase additional reinsurance from unaffiliated reinsurers, AmTrust and/or ACAC would reduce the premium revenue ceded to us. The purchase of such additional reinsurance would however, in general inure to our beneﬁt. Taxation We may become subject to taxes in Bermuda after 2035, which may have a material adverse effect on our ﬁnancial condition and operating results and on an investment in our shares. The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given each of Maiden Holdings and Maiden Bermuda an assurance that if any legislation is enacted in Bermuda that would impose tax computed on proﬁts or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Maiden Holdings, Maiden Bermuda or any of their respective operations or their respective shares, debentures or other obligations (except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by them in respect of real property or leasehold interests in Bermuda held by them) until March 31, 2035. Given the limited duration of the Minister of Finance’s expected assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 31, 2035. Since Maiden Holdings and Maiden Bermuda are incorporated in Bermuda, we will be subject to changes of law or regulation in Bermuda that may have an adverse impact on our operations, including imposition of tax liability. 62 The impact of the Organization for Economic Cooperation and Development’s directive to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda. The Organization for Economic Cooperation and Development (the ‘‘OECD’’) has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002 and as periodically listed as an uncooperative tax haven jurisdiction because it had previously updated, Bermuda was not committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for ﬁnancial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes. We may be subject to U.S. federal income tax, which would have an adverse effect on our ﬁnancial condition and results of operations and on an investment in our shares. to U.S. federal If either Maiden Holdings or Maiden Bermuda were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. federal income and additional branch proﬁts taxes on the portion of its earnings that are effectively connected to such U.S. business or in the case of Maiden Bermuda, if it is entitled to beneﬁts under the U.S. income tax treaty with Bermuda and if Maiden Bermuda were considered engaged in a trade or business in the U.S. through a permanent establishment, Maiden Bermuda could be subject income tax on the portion of its earnings that are attributable to its permanent establishment in the U.S., in which case its results of operations could be materially adversely affected. Maiden Holdings and Maiden Bermuda are Bermuda companies. We intend to manage our business so that each of these companies should operate in such a manner that neither of these companies should be treated as engaged in a U.S. trade or business and, thus, should not be subject to U.S. federal taxation (other than the U.S. federal excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. federal withholding tax on certain U.S. source investment income). However, because (i) there is considerable uncertainty as to activities which constitute being engaged in a trade or business within the U.S.; (ii) a signiﬁcant portion of Maiden Bermuda’s business is reinsurance of AmTrust’s insurance subsidiaries and ACAC’s insurance subsidiaries; (iii) Maiden Bermuda has entered into a brokerage services agreement with IGI Intermediaries, Inc. (‘‘IGI Inc.’’) (an AmTrust subsidiary that provides brokerage services in the U.S.); (iv) our non-executive Chairman of the Board is AmTrust’s President and Chief Executive Officer, and certain of our executive officers or directors and former executive officers are also either executive officers of AmTrust or related to directors of AmTrust, including (a) our former interim Chief Financial Officer for part of 2007 was at the time and is AmTrust’s Chief Financial Officer, (b) our former Chief Executive Officer is currently an executive officer of AmTrust, and (c) one of our directors is related to a signiﬁcant shareholder of AmTrust; (v) one of our Founding Shareholders, Michael Karfunkel, controls ACAC; (vi) we have an asset management agreement with a subsidiary of AmTrust and may also have additional contractual relationships with AmTrust and its subsidiaries in the future, and (vii) the activities conducted outside the U.S. related to Maiden Bermuda’s start-up were limited, thus we cannot be certain that the IRS will not contend successfully that we are engaged in a trade or business in the U.S. Potential Additional Application of the Federal Insurance Excise Tax. The IRS, in Revenue Ruling 2008-15, has formally announced its position that the U.S. federal insurance excise tax (the ‘‘FET’’) is applicable (at a 1% rate on premiums) to all reinsurance cessions or retrocessions of risks by non-U.S. insurers or reinsurers to non-U.S. reinsurers where the underlying risks are either (i) risks of a U.S. entity or individual located wholly or partly within the U.S. or (ii) risks of a non-U.S. entity or individual engaged in a trade or business in the U.S. which are located within the U.S. (‘‘U.S. Situs Risks’’), even if the FET has been paid on prior cessions of the same risks. The legal and jurisdictional basis for, and the method of enforcement of, the IRS’s position is unclear. Maiden Bermuda has not determined if the FET should be applicable with respect to risks ceded to it by, or by it to, a non-U.S. insurance company. If the FET is applicable, it should apply at a 1% rate on premium for all U.S. Situs Risks ceded to Maiden Bermuda by a non-U.S. insurance company, or by Maiden Bermuda to a non-U.S. insurance company, even though the FET also applies at a 1% rate on premium ceded to Maiden Bermuda with respect to such risks. 63 Holders of 10% or more of our shares may be subject to U.S. income taxation under the controlled foreign corporation rules. If you are a ‘‘10% U.S. Shareholder’’ of a non-U.S. corporation (deﬁned as a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively (as deﬁned below)) at least 10% of the total combined voting power of all classes of shares entitled to vote) that is a controlled foreign corporation, which we refer to as a CFC, for an uninterrupted period of 30 days or more during a taxable year, and you own shares in the CFC directly or indirectly through non-U.S. entities on the last day of the CFC’s taxable year, you must include in your gross income for U.S. federal income tax purposes your pro rata share of the CFC’s ‘‘subpart F income’’, even if the subpart F income is not distributed. ‘‘Subpart F income’’ of a non-U.S. insurance corporation typically includes foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income). A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code) (that is, ‘‘constructively’’) more than 50% of the total combined voting power of all classes of voting shares of that non-U.S. corporation or the total value of all stock of that corporation. For purposes of taking into account insurance company in which more than 25% of the total combined voting power of all classes of shares (or more than 25% of the total value of the shares) is owned (directly, indirectly through non-U.S. entities or constructively) by 10% U.S. shareholders on any day during the taxable year of such corporation. insurance income, a CFC also includes a non-U.S. For purposes of this discussion, the term ‘‘U.S. Person’’ means: (i) an individual citizen or resident of the U.S., (ii) a partnership or corporation created or organized in or under the laws of the U.S., or under the laws of any State thereof (including the District of Columbia), (iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source, (iv) a trust if either (1) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (2) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes or (v) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing. Because our Founding Shareholders owned all of the shares of Maiden Holdings prior to July 3, 2007, Maiden Holdings was a CFC during the period of 2007 prior to July 3, 2007. Following the 2007 private offering, Barry Zyskind may be treated as a 10% U.S. Shareholder of Maiden Holdings and Maiden Bermuda as a result of his seat on the board of Maiden Holdings, George Karfunkel and/or Michael Karfunkel may be treated as a 10% U.S. Shareholder of Maiden Holdings and Maiden Bermuda as a result of Yehuda Neuberger’s seat on the board of Maiden Holdings, because of Mr. Neuberger’s signiﬁcant familial connections to the Karfunkels and, through them, to AmTrust. We believe, subject to the discussion below, that because of provisions in our organizational documents that limit voting power and other factors, no U.S. Person who acquired our shares directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of all classes of Maiden Holdings’ or Maiden Bermuda’s shares. However, the IRS could challenge the effectiveness of the provisions in our organizational documents and a court could sustain such a challenge. Accordingly, no assurance can be given that a U.S. Person (other than the Founding Shareholders) who owns our shares will not be characterized as a 10% U.S. Shareholder. U.S. Persons who hold our shares may be subject to U.S. federal income taxation at ordinary income rates on their proportionate share of Maiden Bermuda’s related person insurance income. If U.S. persons are treated as owning 25% or more of Maiden Bermuda’s shares (by vote or by value) (as is expected to be the case) and the related person insurance income (‘‘RPII’’) of Maiden Bermuda (determined on a gross basis) were to equal or exceed 20% of Maiden Bermuda’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to those insureds) own directly or indirectly through entities 20% or more of the voting power or value of our shares, then a U.S. Person who owns any shares of Maiden Bermuda (directly or indirectly through non-U.S. entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of Maiden Bermuda’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. Persons at that date, regardless of whether such income is distributed. In addition, any RPII that is 64 includible in the income of a U.S. tax-exempt organization generally will be treated as unrelated business taxable income. The amount of RPII earned by Maiden Bermuda (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of shares or any person related to such holder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by Maiden Bermuda. As of December 31, 2012, we believe that either (i) the direct or indirect insureds of Maiden Bermuda (and related persons) should not directly or indirectly own 20% or more of either the voting power or value of our shares or (ii) the RPII (determined on a gross basis) of Maiden Bermuda should not equal or exceed 20% of Maiden Bermuda’s gross insurance income for the taxable year ended December 31, 2012 and we do not expect both of these thresholds to be exceeded in the foreseeable future. However, we cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond our control. U.S. Persons who dispose of our shares may be subject to U.S. federal income taxation at the rates applicable to dividends on a portion of their gains if any. the holder’s share of The RPII rules provide that if a U.S. Person disposes of shares in a non-U.S. insurance corporation in which U.S. Persons own 25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as a dividend the corporation’s undistributed earnings and proﬁts that were to the extent of accumulated during the period that the holder owned the shares (whether or not such earnings and proﬁts are attributable to RPII). In addition, such a holder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the holder. These RPII rules should not apply to dispositions of our shares because Maiden Holdings will not be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department in ﬁnal regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clariﬁcations might ultimately be made thereto or whether any such changes, as well as any interpretation or application of the courts, or otherwise, might have retroactive effect. The U.S. Treasury the RPII rules by the IRS, Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application thereof to Maiden Holdings and Maiden Bermuda is uncertain. U.S. Persons who hold our shares will be subject to adverse U.S. federal income tax consequences if Maiden Holdings is considered to be a passive foreign investment company. If Maiden Holdings is considered a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes, a U.S. Person who owns directly or, in some cases, indirectly (e.g. through a non-U.S. partnership) any of our shares will be subject to adverse U.S. federal income tax consequences, including subjecting the investor to a greater tax liability than might otherwise apply and subjecting the investor to a tax on amounts in advance of when such tax would otherwise be imposed, in which case your investment could be materially adversely affected. In addition, if Maiden Holdings were considered a PFIC, upon the death of any U.S. individual owning our shares, such individual’s heirs or estate would not be entitled to a ‘‘step-up’’ in the basis of the shares which might otherwise be available under U.S. federal income tax laws. We believe that we are not, and we currently do not expect to become, a PFIC for U.S. federal income tax purposes; however, there can be no assurance that we will not be deemed a PFIC by the IRS. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance would have on a shareholder that is subject to U.S. federal income taxation. The Quota Share Agreements between Maiden Bermuda and AmTrust and ACAC, respectively, may be subject to recharacterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on our ﬁnancial condition and operating results. Under section 845 of the Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties to the reinsurance agreement, or in circumstances where one party is an agent of the other, recharacterize such items, or make any other 65 adjustment, in order to reﬂect the proper source, character or amount of the items for each party. In addition, if a reinsurance contract has a signiﬁcant tax avoidance effect on any party to the contract, the IRS may make adjustments with respect to such party to eliminate the tax avoidance effect. No regulations have been issued under section 845 of the Code. Accordingly, the application of such provisions is uncertain and we cannot predict what impact, if any, such provisions may have on us. Changes in U.S. federal income tax law could materially adversely affect an investment in our shares. In the past, legislation has been introduced in the U.S. Congress (but not enacted) intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections. It is possible that legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse effect on us, or our shareholders. For example, President Obama’s 2011 budget proposal would reduce or eliminate the tax deduction for reinsurance premiums paid by a U.S. insurer or reinsurer to an affiliate in a lower tax jurisdiction, such as Bermuda. Another proposal would treat foreign corporations as U.S. corporations for tax purposes if management and control occur primarily in the U.S. Any such change in U.S. tax law could have a material adverse effect on the Company. Additionally, the U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S., or is a PFIC or whether U.S. Persons would be required to include in their gross income the ‘‘subpart F income’’ or the RPII of a CFC are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to insurance companies and the regulations regarding RPII are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. We cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect. We may be subject to United Kingdom taxes, which would have an adverse effect on our ﬁnancial condition and results of operations and on an investment in our shares. A company which is resident in the U.K. for U.K. corporation tax purposes is subject to U.K. corporation tax in respect of its worldwide income and gains. While Maiden Global is a U.K. company, neither Maiden Holdings nor Maiden Bermuda are incorporated in the U.K. Nevertheless, Maiden Holdings or Maiden Bermuda would be treated as being resident in the U.K. for U.K. corporation tax purposes if its central management and control were exercised in the U.K. The concept of central management and control is indicative of the highest level of control of a company’s affairs, which is wholly a question of fact. The directors and officers of both Maiden Holdings and Maiden Bermuda intend to manage their affairs so that both companies are resident in Bermuda, and not resident in the U.K., for U.K. tax purposes. However, Her Majesty’s Revenue & Customs could challenge our tax residence status. A company which is not resident in the U.K. for U.K. corporation tax purposes can nevertheless be subject to U.K. corporation tax at the rate of 24%, falling to 23% from 1 April 2013. if it carries on a trade in the U.K. through a permanent establishment in the U.K., but the charge to U.K. corporation tax is limited to proﬁts (including income proﬁts and chargeable gains) attributable directly or indirectly to such permanent establishment. The directors and officers of Maiden Bermuda intend to operate the business of Maiden Bermuda in such a manner that it does not carry on a trade in the U.K. through a permanent establishment in the U.K. Nevertheless, Her Majesty’s Revenue & Customs might contend successfully that Maiden Bermuda is trading in the U.K. through a permanent establishment in the U.K. because there is considerable uncertainty as to the activities which constitute carrying on a trade in the U.K. through a permanent establishment in the U.K. The U.K. has no income tax treaty with Bermuda. Companies that are neither resident in the U.K. nor entitled to the protection afforded by a double tax treaty between the U.K. and the jurisdiction in which they are resident are liable to income tax in the U.K., at the basic rate of 22%, on the proﬁts of a trade carried on in the U.K., where that trade is not carried on through a permanent establishment in the U.K. The directors and officers of Maiden Bermuda intend to operate the business in such a manner that Maiden Bermuda will not fall within the charge to income tax in the U.K. (other than by way of deduction or withholding) in this respect. 66 If either Maiden Holdings or Maiden Bermuda were treated as being resident in the U.K. for U.K. corporation tax purposes, or if Maiden Bermuda were treated as carrying on a trade in the U.K., whether through a permanent establishment or otherwise, the results of our operations would be materially adversely affected. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. We currently lease office space in Bermuda (our corporate headquarters), the United States, the United Kingdom, Germany, Austria and Russia for the operation of our business. We also lease a property for employee use in Bermuda. Our office leases have remaining terms ranging from 3 months to approximately 5 years in length. We renew and enter into new leases in the ordinary course of business as needed. While we believe that the office space from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please see Note 12 to the Consolidated Financial Statements in this Annual Report on Form 10-K. We renewed our office space lease in Hamilton, Bermuda commencing December 1, 2012 for Maiden Holdings and Maiden Bermuda. The term of this agreement expires on November 30, 2017 with an option to renew for another ﬁve years. We have an office space lease in Mount Laurel, New Jersey expiring on May 31, 2015, for use by Maiden Re, Maiden US and Maiden Specialty. We have also executed an office space lease in Beaconsﬁeld, Buckinghamshire, United Kingdom commencing on October 1, 2010, for Maiden Global; the initial term of this agreement expires on October 1, 2015, with one option of ﬁve years. We also have ten other office space leases in the U.S., one property lease in Bermuda and one office space lease in each of Germany, Austria and Russia, respectively, with various expiry dates. Item 3. Legal Proceedings. We may become involved in various claims and legal proceedings that arise in the normal course of our business, which are not likely to have a material adverse effect on our ﬁnancial position, results of operations or liquidity. In April 2009, the Company learned that Bentzion S. Turin, the former Chief Operating Officer, General Counsel and Secretary of Maiden Holdings and Maiden Bermuda, sent a letter to the U.S. Department of Labor claiming that his employment with the Company was terminated in retaliation for corporate whistle blowing in violation of the whistle blower protection provisions of the Sarbanes-Oxley Act of 2002. Mr. Turin alleged concerns regarding corporate governance with respect to negotiation of the terms of the TRUPS Offering and seeks reinstatement as Chief Operating Officer, General Counsel and Secretary of Maiden Holdings and Maiden Bermuda, back pay and legal fees incurred. The Company believes that it had ample reason for terminating such employment for good and sufficient legal cause, and the Company believes that the claim is without merit and is vigorously defending this claim. On December 31, 2009, the U.S. Secretary of Labor found no reasonable cause for Mr. Turin’s claim and dismissed the complaint in its entirety. Mr. Turin objected to the Secretary’s ﬁndings and requested a hearing before an administrative law judge in the U.S. Department of Labor. The Company moved to dismiss Mr. Turin’s complaint, and its motion was granted by the Administrative Law Judge on June 30, 2011. On July 13, 2011, Mr. Turin ﬁled a petition for review of the Administrative Law Judge’s decision with the Administrative Review Board in the U.S. Department of Labor. The Company ﬁled its brief in opposition to the petition for review on October 19, 2011. Item 4. Mine Safety Disclosures. Not applicable. 67 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common shares began publicly trading on the NASDAQ Global Select Market under the symbol ‘‘MHLD’’ on May 6, 2008. The following table sets out the high and low prices for our common shares for the periods indicated as reported by the NASDAQ Global Select Market. Such prices reﬂect inter-dealer prices, without retail mark-up, mark-down or commission, and do not necessarily represent actual transactions. 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $8.48 $9.75 $9.88 $8.95 $9.73 $8.79 $9.52 $9.21 $7.10 $7.14 $7.32 $6.99 $8.25 $7.84 $8.16 $8.10 At February 25, 2013, the last reported sale price of our common share was $9.98 per share and there were 22 holders of record of our common shares. This ﬁgure does not represent the actual number of beneﬁcial owners of our common shares because shares are frequently held in ‘‘street name’’ by securities dealers and others for the beneﬁt of beneﬁcial owners who may vote the shares. During the years ended December 31, 2012 and 2011, we declared regular quarterly dividends totaling $0.33 and $0.30 per common share, respectively. The continued declaration and payment of dividends to holders of common shares is expected but will be at the discretion of our board of directors and subject to speciﬁed legal, regulatory, ﬁnancial and other restrictions. On December 24, 2012, the Company adopted a written trading plan to facilitate the repurchase of its common shares in accordance with the Company’s existing share purchase reauthorization whereby in August 2012, the Board of Directors approved the repurchase of up to $75 million common shares. During the year ended, December 31, 2012, there was no common shares repurchased by the Company. As a holding company, our principal source of income is dividends or other statutorily permissible payments from our subsidiaries. The ability of our subsidiaries to pay dividends is limited by the applicable laws and regulations of the various countries in which we operate, including Bermuda and the U.S. See Item 1 Business — Regulatory Matters, Item 7 Management’s Discussion and Analysis of Financial Condition, and Results of Operations — Liquidity and Capital Resources — Restrictions, Collateral and Speciﬁc Requirements, and Note 17 of the notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. 68 Performance Graph The following information is not deemed to be ‘‘soliciting material’’ or to be ‘‘ﬁled’’ with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the report shall not be deemed to be incorporated by reference into any prior or subsequent ﬁling by the Company under the Securities Act or the Exchange Act. The following graph shows the cumulative total return, including reinvestment of dividends, on the common shares compared to such return for S&P 500 Composite Stock Price Index (‘‘S&P 500’’), and NASDAQ Insurance Index for the period beginning on May 6, 2008, the date of our listing on NASDAQ, and ending on December 31, 2012, assuming $100 was invested on May 6, 2008. The measurement point on the graph represents the cumulative shareholder return as measured by the last reported sale price on such date during the relevant period. Total Return To Shareholders (Includes Reinvestment of Dividends) Comparison of Cumulative Total Return 160 140 120 100 80 60 40 20 0 8 0 0 5 / 6 / 2 0 / 2 6 / 3 8 0 0 0 / 2 9 / 3 8 0 0 1 2 / 3 8 0 0 1 / 2 9 0 0 0 0 0 / 2 9 9 / 3 6 / 3 1 / 2 3 / 3 0 0 0 / 2 9 1 0 1 0 9 0 0 1 / 2 3 / 3 0 / 2 6 / 3 0 1 0 0 / 2 9 / 3 1 / 2 2 / 3 0 1 0 1 / 2 1 0 0 1 2 / 3 1 / 2 3 / 3 1 1 0 0 / 2 6 / 3 1 1 0 0 / 2 9 / 3 1 0 1 1 2 / 3 1 1 0 0 / 2 2 1 0 2 1 0 9 / 2 6 / 2 8 / 2 9 / 2 0 / 2 3 / 3 2 1 0 1 / 2 2 1 0 1 2 / 3 MHLD NASDAQ Insurance S&P 500 69 Item 6. Selected Financial Data. The following tables set forth our summary historical statement of operations data and summary balance sheet data as of and for the years ended December 31, 2012, 2011 and 2010. Statement of operations data and balance sheet data are derived from our audited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see Item 1A. ‘‘Risk Factors’’ in this Annual Report on Form 10-K. You should read the following selected ﬁnancial data in conjunction with the other information contained in this Annual Report on Form 10-K, including Item 7 ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and Item 8 ‘‘Financial Statements and Supplementary Data’’. For the Year Ended December 31, 2012 2011 ($ in Millions, Except per Share Amounts and Ratios) 2010 Summary Consolidated Statement of Income Data: Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Other insurance revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains on investments . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . Commissions and other acquisition expenses . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . Interest and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . Accelerated amortization of junior subordinated debt discount and issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt repurchase expense . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income attributable to noncontrolling interests . . . . . . . . . . . . . . . Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Maiden common shareholders . . . . . . $ 2,001.0 $ 1,901.3 $ 1,803.8 $ 12.9 81.2 1.9 1,899.8 1,262.3 492.1 53.8 36.4 — — 4.4 (1.6) 2.2 0.1 1,849.7 (3.6) 46.5 $ 1,812.6 $ 1,723.5 $ 1,552.4 $ 12.6 74.9 0.5 1,640.4 1,043.1 438.8 53.9 34.1 20.3 15.1 5.0 (0.3) 1.9 — 1,611.9 — 28.5 $ 1,298.1 1,227.8 1,169.8 — 71.6 6.6 1,248.0 755.1 336.7 42.2 36.5 — — 5.8 0.5 1.3 — 1,178.1 — 69.9 Per Share Data: Earnings per common share(1): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.64 $ 0.64 $ 0.40 $ 0.39 $ 0.99 0.98 72,263,022 73,105,531 72,155,503 72,903,688 0.33 $ 0.30 $ 70,799,966 71,372,688 0.265 Weighted average number of common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per common share . . . . . . . . . . . . . . . . . . . . $ 70 For the Year Ended December 31, Selected Consolidated Ratios: Loss and loss adjustment expense ratio(2) . . . . . . . . . . . . . . . . . . . . . Commission and other acquisition expense ratio(3) . . . . . . . . . . . . . . . General and administrative expense ratio(4) . . . . . . . . . . . . . . . . . . . . Expense ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 2010 69.5% 27.1% 2.9% 30.0% 99.5% 66.6% 28.0% 3.5% 31.5% 98.1% 64.6% 28.8% 3.5% 32.3% 96.9% December 31, 2012 2011 ($ in Millions, Except per Share Amounts) 2010 Summary Consolidated Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . Investments at fair market value . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance balances receivable, net . . . . . . . . . . . . . . . . . . . . . . . . Funds withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred commission and other acquisition expenses . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for loss and loss adjustment expenses. . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase, at contract value . . . . . Senior notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Maiden shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per common share(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81.5 132.3 2,621.6 522.6 42.7 168.0 270.7 4,138.2 1,740.3 936.5 — 207.5 126.3 1,015.2 $ 11.96 $ 188.1 114.9 2,022.9 423.4 42.6 168.0 248.4 3,395.1 1,398.4 832.0 — 107.5 126.3 768.6 $ 10.64 $ 96.2 89.8 1,880.3 226.3 152.7 168.0 203.6 2,982.6 1,226.8 657.6 76.2 — 215.2 750.2 $ 10.40 (1) Please refer to Note 13 of the notes to Consolidated Financial Statements for the calculation of basic and diluted earnings per common share. (2) Calculated by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue. (3) Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. (4) Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. (5) Calculated by combining the commission and other acquisition expense ratio and the general and administrative expense ratio. (6) Calculated by combining the net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio. (7) Basic book value per common share is deﬁned as total shareholders’ equity available to common shareholders divided by the number of common shares issued and outstanding as of the end of the period, giving no effect to dilutive securities. 71 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of the Company’s ﬁnancial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. Amounts in tables may not reconcile due to rounding differences. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the ‘‘Special Note About Forward-Looking Statements’’ in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the ‘‘Risk Factors’’ set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. 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 risk proﬁle intact. These transactions have increased our gross premiums written to in excess of $2.0 billion in 2012 while strongly positioning our capital to extend its business platform both in the U.S. and internationally and include: • • • • • Entering into a quota share reinsurance agreement with American Capital Acquisition Corporation (‘‘ACAC’’) in 2010 (the ‘‘ACAC Quota Share’’); Acquiring the majority of the reinsurance-related infrastructure, assets and liabilities of U.K.-based GMAC International Insurance Services, Ltd. in 2010 (the ‘‘IIS Acquisition’’); Completing a public debt offering of $107.5 million in June 2011 and repurchasing a like amount of our outstanding TRUPS Offering securities in July 2011 (‘‘2011 Senior Notes’’); Completing a public debt offering of $100.0 million in March 2012 (‘‘2012 Senior Notes’’). The net proceeds of $96.6 million have been used for working capital and general corporate purposes; and Completing a public offering of $150.0 million Preference Shares — Series A (the ‘‘Preference Shares’’). The Company received net proceeds of $145.0 million from the offering. The net proceeds from the offering are expected to be used for continued support and development of our reinsurance business and for other general corporate purposes, which may include repurchasing a portion of the Company’s outstanding common shares and repurchasing the Company’s outstanding 14% 30-year trust preferred securities (‘‘TRUPS’’) issued in January 2009. These signiﬁcant transactions along with other unusual or non-recurring events should be considered when evaluating year-to-year comparability or when comparing our performance with other companies considered our peers and with whom we compete 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 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 provide reinsurance through our wholly owned subsidiaries, Maiden US and Maiden Bermuda and have operations in the United States and Bermuda. On a more limited basis, 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. During 2013, it is our intention to substantially reduce our exposure to these coverages. Maiden Bermuda does not underwrite any primary insurance business. Maiden LF is a life insurer organized in Sweden and writes credit life insurance on a primary basis in support of Maiden Global business development efforts. 72 We currently operate our business through three segments: Diversiﬁed Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share. As of December 31, 2012, we had approximately $4.1 billion in total assets, $1.0 billion of total shareholders’ equity and $1.3 billion in total capital, which includes shareholders’ equity, the senior notes and junior subordinated debt. The market conditions in which we operate have historically been cyclical, experiencing cycles of price erosion followed by rate strengthening as a result of catastrophes or other signiﬁcant losses that affect the overall capacity of the industry to provide coverage. During the period covered by this discussion, the reinsurance market has been characterized by signiﬁcant competition in most lines of business. Natural and man-made catastrophes occur each year that affect reinsurance industry results. In each of the last three years the insurance and reinsurance industry has 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. Despite the elevated levels of global and U.S. catastrophe losses affecting the industry during this period, industry ﬁnancial conditions, taken as a whole, have continued to improve through a combination of very positive non-catastrophe underwriting results, enhanced balance sheets resulting from strong ﬁxed income market performance and readily available capital sources for industry participants. As a result, capital positions across the insurance and reinsurance industry appeared to remain adequate through December 31, 2012. However, the property and casualty industry invests signiﬁcant portions of its premiums and retained underwriting proﬁts in ﬁxed income maturities and relies signiﬁcantly on investment income to generate acceptable levels of net income. Yields on these securities have continued to decline and remain at historically low levels. Interest rates are widely forecast to persist at such levels for the foreseeable future. During the third quarter of 2012, the U.S. Federal Reserve announced additional policy measures designed to provide the mortgage-backed securities market. The in particular greater U.S. Federal Reserve announced additional actions in the fourth quarter of 2012 further increasing liquidity in credit markets. The likely continued existence of these investment conditions should continue to adversely impact the results of the property and casualty industry generally, placing additional pressure on both insurance and reinsurance companies underwriting results. liquidity to certain credit markets, Although the combined ultimate impact of recent catastrophe activity, in particular Superstorm Sandy, and the ﬁxed income investment environment remains unclear and is currently more uncertain in light of reinsurance industry performance, broad industry conditions brought about by these events remain supportive of improved pricing in primary insurance markets in the near term. To date however, industry ﬁnancial conditions have limited the amount of enhanced reinsurance pricing the industry would normally experience during periods of increased catastrophe losses. More recently, January 1 reinsurance renewals for the industry appeared to show limited pricing improvement as a result of Sandy. However, the scope and tenure of any improved pricing environment remains 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. Depending on the ultimate impact of Superstorm Sandy combined with the continuing unfavorable investment environment on industry capital positions and proﬁtability, a signiﬁcant positive effect on competition and pricing is possible. We believe we are well positioned to take advantage of market conditions should the pricing environment become more favorable. 73 Recent Developments Losses Incurred from Catastrophic Events As we have described, our business model is designed to minimize our exposure to catastrophic property losses. Despite this approach, we periodically do incur losses from such events which exceed our provisions for normalized catastrophe activity, which occurred both in 2011 and 2012. In 2011, the unusually high frequency of loss activity from U.S. thunderstorm and tornado impacted our U.S. clients in the second quarter of 2011, adversely affecting the Company’s results. The 2011 results include $9.5 million in losses incurred by Maiden US related to thunderstorm and tornado activity across the U.S. in the second quarter, net of the Company’s quarterly provisions for normalized catastrophe activity. These losses increased our loss ratio and combined ratio for that period by 0.6% on a consolidated basis. In 2012, we incurred signiﬁcant losses as a result of Superstorm Sandy which struck the Northeast U.S. on October 29, 2012. Presently, industry insured losses are likely to exceed $20 billion making it the largest catastrophe loss in U.S. history. Based on a comprehensive analysis of the Company’s exposure in the affected area, as well as loss reports and estimates from clients, we initially expected the underwriting impact from Superstorm Sandy, net of applicable reinsurance and the Company’s provision for normalized catastrophe losses to be in the range of between $25 million and $35 million. Maiden’s exposure to this event emanates predominantly from the Company’s excess property insurance business written by Maiden Specialty, and to a lesser extent from the U.S. assumed treaty reinsurance business written by Maiden US and the ACAC Quota Share. For the year ended December 31, 2012, the Company has presently incurred $31.1 million in losses from Sandy, which increased its loss ratio and combined ratio by 1.7% for the year. The sources of these losses are as follows: For the Year Ended December 31, 2012 Maiden US Maiden Specialty ACAC Total ($ in Millions) Losses Incurred . . . . . . . . . . . . . . . . . . . . . . % of Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.5 20.9% $22.6 72.7% $2.0 6.4% $ 31.1 100.0% Other U.S.-based catastrophe experience in 2011 and 2012 were within the Company’s expected parameters which are incorporated into the pricing of our Maiden US accounts. Despite these elevated level of weather-related losses in 2011 and 2012, consistent with its operating model, Maiden has maintained proﬁtable underwriting results in both years. Issuance of Preference Shares On August 22, 2012, the Company issued six million 8.25% Preference Shares, par value $0.01 per share, at $25 per share. The Company received net proceeds of $145.0 million from the offering, after deducting expenses and underwriting discounts of $5.0 million. The Preference Shares have no stated maturity date and are redeemable in whole or in part at the option of the Company any time on or after August 29, 2017 at a redemption price of $25 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Dividends on the Preference Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preference Shares for any dividend period, holders of Preference Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. The holders of Preference Shares will be entitled to receive dividend payments only when, as and if declared by the Company’s board of directors or a duly authorized committee of the board of directors. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.25% of the $25 liquidation preference per annum. 74 The holders of the Preference Shares have no voting rights other than the right to elect up to two directors if preference share dividends are not declared and paid for six or more dividend periods. The Preference Shares have been listed on the New York Stock Exchange and trading commenced on August 31, 2012 under the symbol ‘‘MHPRA’’. Senior Note Offerings On June 24, 2011, the Company’s wholly-owned U.S. holding company subsidiary, Maiden NA, closed the offering of $107.5 million aggregate principal amount of 8.25% Senior Notes due June 15, 2041 (‘‘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 up 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 estimated offering expenses payable 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 Company incurred a non-recurring repurchase expense of approximately the TRUPS Offering, $15.1 million, which was reported in the Company’s results of operations for the year ended December 31, 2011. 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 for the year ended December 31, 2011, which represents the accelerated amortization of original issue discount and issuance costs associated with equity issued in conjunction with the TRUPS Offering. On March 27 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. 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’’. The net proceeds from the 2012 Senior Notes of $96.6 million have been used for working capital and general corporate purposes. The 2011 Senior Notes and 2012 Senior Notes may also be referred to as the ‘‘2011 Senior Note Offering’’ or the ‘‘2012 Senior Note Offering’’, respectively, and may collectively be referred to as the ‘‘Senior Note Offerings’’. 2012 Financial Highlights 2012 Consolidated Results of Operations • • • Net income attributable to Maiden common shareholders of $46.5 million, or $0.64 basic and diluted earnings per common share for the year ended December 31, 2012 compared to $28.5 million, or $0.40 basic and $0.39 diluted earnings per common share for the year ended December 31, 2011. Operating earnings of $48.5 million, or $0.67 basic and $0.66 diluted operating earnings per common share for the year ended December 31, 2012 compared to $69.6 million, or $0.97 basic and $0.96 diluted operating earnings per common share for the year ended December 31, 2011. Gross premiums written of $2.0 billion for the year ended December 31, 2012, a 10.4% increase over the year ended December 31, 2011. 75 • • • Net premiums earned of $1.8 billion for the year ended December 31, 2012, a 16.2% increase over the year ended December 31, 2011. Underwriting income of $18.7 million and combined ratio(1) of 99.5% for December 31, 2012 compared to $42.8 million and 98.1% for the year ended December 31, 2011. the year ended Net investment income of $81.2 million for the year ended December 31, 2012, a 8.4% increase over the year ended December 31, 2011. 2012 Consolidated Financial Condition • • • • • • Operating return on common equity of 5.9% for the year ended December 31, 2012 compared to 9.2% for the year ended December 31, 2011. Common shareholders’ equity of $865.2 million at December 31, 2012 compared to $768.6 million at December 31, 2011; book value per common share of $11.96 and $10.64 at December 31, 2012 and 2011, respectively. Total cash and investments of $2.8 billion and $2.3 billion at December 31, 2012 and 2011, respectively; ﬁxed maturities comprise 92.4% and 86.9% of total invested assets, of which 48.0% and 60.1% have a credit rating of AA+ or better and an overall average credit rating of A+ at December 31, 2012 and 2011, respectively. Total assets of $4.1 billion at December 31, 2012 compared to $3.4 billion at December 31, 2011. Reserve for loss and loss adjustment expenses of $1.7 billion and $1.4 billion at December 31, 2012 and 2011, respectively. Total debt of $333.8 million and $233.8 million at December 31, 2012 and 2011, respectively, and a debt to total capitalization ratio of 24.7% and 23.3% at December 31, 2012 and 2011, respectively. 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 U.S. GAAP. These non-GAAP measures are: Operating Earnings and Operating Earnings per Common Share: In addition to presenting net income determined in accordance with U.S. 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 U.S. 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 and unrealized gains or losses on investment and foreign exchange and other 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. (1) Combined ratio is an operating metric. See ‘‘Non-GAAP Financial Measures’’ for additional information. 76 We also exclude certain non-recurring expenditures that are material to understanding our results of operations, including the following: • • for 2011 and 2010, we exclude transaction expenses related to the IIS Acquisition as these are non-recurring; and in 2011, we exclude the Junior Subordinated Debt amortization of Junior Subordinated Debt discount and issuance costs. repurchase expense and the accelerated The following is a reconciliation of operating earnings to its most closely related GAAP measure, net income. For the Year Ended December 31, Net income attributable to Maiden common shareholders . . . . . . Add (subtract): Net realized and unrealized gains on investment. . . . . . . . . . . Foreign exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt repurchase expense . . . . . . . . . . . . . Accelerated amortization of junior subordinated debt discount and issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-recurring general and administrative expenses relating to IIS Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . Operating earnings attributable to Maiden 2012 $46.5 2011 ($ in Millions) $28.5 2010 $69.9 (1.9) (1.6) 4.4 — — — 1.1 (0.5) (0.3) 5.0 15.1 20.3 0.2 1.3 (6.6) 0.5 5.8 — — 1.9 1.2 common shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48.5 $69.6 $72.7 Operating earnings per common share: Basic operating earnings per common share . . . . . . . . . . . . . . . Diluted operating earnings per common share . . . . . . . . . . . . . . $0.67 $0.66 $0.97 $0.96 $1.03 $1.02 Operating Return on Common Equity (‘‘Operating ROCE’’): Management uses operating return on average common 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 ROCE, which management believes provides an attractive return to shareholders for the risk assumed. Operating ROCE for the years ended December 31, 2012, 2011 and 2010 is computed as follows: For the Year Ended December 31, Operating earnings available to common shareholders . . Opening common shareholders’ equity . . . . . . . . . . . . Ending common shareholders’ equity . . . . . . . . . . . . . Average common shareholders’ equity . . . . . . . . . . . . 2012 $ 48.5 $768.6 $865.2 $816.9 2011 ($ in Millions) $ 69.6 $750.2 $768.6 $759.4 2010 $ 72.7 $676.5 $750.2 $713.4 Operating return on common equity . . . . . . . . . . . . . . 5.9% 9.2% 10.2% The decrease in Operating ROCE for the year ended December 31, 2012 is primarily due to lower net income in 2012 as a result of losses from Superstorm Sandy. In addition, Operating ROCE was further reduced by greater increases in the common shareholders’ equity in 2012, the combined effect of net income along with higher other comprehensive income for the year ended December 31, 2012, the result of a $79.9 million increase in unrealized gains on the Company’s ﬁxed maturity investment portfolio. Book Value per Common Share: Management uses growth in book value per common share as a prime measure of the value the Company is generating for its common shareholders, as management believes that 77 growth in the Company’s book value per common share ultimately translates into growth in the Company’s share price. Book value per common share is calculated using common shareholders’ equity (shareholders’ equity excluding the aggregate liquidation value of our preference shares) divided by the number of common shares outstanding. Preference Shares are not included in the computation of book value per common share. Book value per common 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 common share as of December 31, 2012, 2011 and 2010 is computed as follows: December 31, 2012 Ending common shareholders’ equity . . . . . . . . . . . . . $ 865.2 $ 2011 ($ in Millions) 768.6 2010 $ 750.2 Common shares outstanding . . . . . . . . . . . . . . . . . . . Book value per common share . . . . . . . . . . . . . . . . $ 72,343,947 72,221,428 72,107,100 11.96 $ 10.64 $ 10.40 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 net 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 loss and loss adjustment expenses, commission and other acquisition expenses and general and administrative expenses are less than the net premiums earned and other insurance revenue on that business. We have generated underwriting income in each year since our inception. Underwriting income is calculated by subtracting net loss and loss adjustment expenses, commissions and other acquisition expenses and applicable general and administrative expenses from the net premiums earned and other insurance revenue and is the monetized counterpart of the combined ratio. For purposes of these operating measures, the fee-generating business (‘‘IIS Fee Business’’) associated with the IIS Acquisition 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 Consolidated Statements of Income. While an important metric of success, underwriting income and combined ratio do not reﬂect all components of proﬁtability, as they do 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 cash and investments by segment, income and interest expense are not allocated to individual reportable segments. Certain 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. investment The ‘‘net loss and loss adjustment expense ratio’’ is derived by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue. The ‘‘commission and other acquisition expense ratio’’ is derived by dividing commission and other acquisition expenses 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 other acquisition expense ratio and the general and administrative expense ratio. 78 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 AFS, and other investments. In accordance with U.S. GAAP, these investments are carried at fair market value and unrealized gains and losses on the Company’s investments are generally excluded from earnings. These unrealized gains and losses are included on the Company’s 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 the portion that can be recovered from reinsurers; and for known claims, less 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 including the amortization of previously deferred commission and other unearned premiums and (3) 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. Critical Accounting Policies and Estimates It is important to understand our accounting policies in order to understand our ﬁnancial position and results of operations. The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of ﬁnancial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that management believes are the most critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ signiﬁcantly from the underlying assumptions and estimates used by management, there could be material adjustments to prior estimates that could potentially adversely affect the Company’s results of operations, ﬁnancial condition and liquidity. These critical accounting policies and estimates should be read in conjunction with the Company’s Notes to Consolidated Financial Statements, including Note 2, Signiﬁcant Accounting Policies, for a full understanding of the Company’s accounting policies. 79 Reserve for Loss and Loss Adjustment Expenses General The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the reporting tail. Lines of business for which claims are reported quickly are commonly referred to as short-tail lines; and lines of business for which a longer period of time elapses before claims are reported to the reinsurer are commonly referred to as long-tail lines. In general, for reinsurance, the time lags are longer than for primary business due to the delay that occurs between the cedant becoming aware of a loss and reporting the information to its reinsurer(s). The delay varies by reinsurance market (country of cedant), type of treaty, whether losses are paid by the cedant and the size of the loss. The delay could vary from a few weeks to a year or sometimes longer. Because a signiﬁcant amount of time can elapse between the assumption of risk, particularly on longer-tail lines of business, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company (‘‘the reinsurer’’) and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid loss and loss adjustment expenses (‘‘loss reserves’’) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (‘‘case reserves’’), ACRs and IBNR reserves. Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company. ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and ACRs. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (‘‘ULAE’’) associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves. For excess of loss treaties, cedents generally are required to report losses that either exceed 50% of the retention, have a reasonable probability of exceeding the retention or meet deﬁned reporting criteria. All reinsurance claims that are reserved are reviewed at least every six months. For proportional treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding losses. They can be submitted 60 to 90 days after the close of the reporting period. Some proportional treaties have speciﬁc language regarding earlier notice of serious claim. For all lines, the Company’s objective is to estimate ultimate loss and loss adjustment expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves. IBNR is the estimated liability for (1) changes in the values of claims that have been reported to us but are not yet settled, as well as (2) claims that have occurred but have not yet been reported. Each claim is settled individually based upon its merits, and particularly for longer-tailed lines of business, it is not unusual for a claim to take years after being reported to settle, especially if legal action is involved. As a result, the reserve for loss and loss adjustment expenses include signiﬁcant estimates for IBNR reserves. The reserve for IBNR is estimated by management for each account based on various factors, including our underwriting teams expectations about loss experience, actuarial analysis and loss experience to date. Our actuaries employ standard actuarial methodologies to determine estimated ultimate loss reserves. In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the treaties and underwriting year for which the projection is made. The the Expected Loss Ratio methodologies that method, applicable) Paid and the Company uses other methodologies to estimate Bornhuetter-Ferguson (‘‘B-F’’) methods. In addition, liabilities for speciﬁc types of occurrences. For example, external and vendor catastrophe models are typically the Company employs include, but may not be limited to, the Reported Loss Development method Incurred and the (as 80 used in the estimation of loss and loss adjustment expenses at the early stages of catastrophe losses before loss information is reported to the reinsurer. The reserve methodologies employed by the Company are dependent on data that the Company collects. This data consists primarily of loss amounts and loss payments reported by the Company’s cedants, and premiums written and earned reported by cedants or estimated by the Company. The actuarial methods used by the Company to project loss reserves in the Diversiﬁed Reinsurance segment that it will pay in the future (future liabilities) do not generally include methodologies that are dependent on claim counts reported, claim counts settled or claim counts open as, due to the nature of the Company’s business, this information is not routinely provided by cedants for every treaty. However, the Company does use actuarial methods in the AmTrust Quota Share Reinsurance and ACAC Quota Share segments that are dependent on claim counts reported, claim counts settled or claim counts open. Consequently, actuarial methods relying on this information cannot be used by the Company to estimate loss reserves in the Diversiﬁed Reinsurance segment. The reserve for loss and loss adjustment expenses as of December 31, 2012 and 2011 comprised: December 31, 2012 2011 ($ in Millions) Reserve for reported loss and loss adjustment expenses . . . . . . . . . . . Reserve for losses incurred but not reported . . . . . . . . . . . . . . . . . . Reserve for loss and loss adjustment expenses . . . . . . . . . . . . . . . $1,029.6 710.7 $1,740.3 $ 820.8 577.6 $1,398.4 While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e. unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e. favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverable in the periods in which they are determined. Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on actuarial projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are reﬁned as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty reinsurance lines of business also increase the uncertainties of our reserve estimates in such lines. Actuarial Methods Used to Estimate Loss and Loss Adjustment Expense Reserves We utilize a variety of standard actuarial methods in our analysis. The selections from these various methods are based on the loss development characteristics of the speciﬁc line of business. The actuarial methods we utilize include: The Expected Loss Ratio (‘‘ELR’’) method is a technique that multiplicatively applies an expected loss ratio to earned premium to yield estimated ultimate losses. The ELR assumption is derived most often from the pricing of the business that is being reserved but can be based on historical experience of the business. This method is frequently used for the purpose of stability in the early valuations of an underwriting year with large and uncertain loss development factors. This technique does not take into account actual loss experience for the underwriting year being projected. As an underwriting year matures and actual loss experience becomes available, other methods may be applied in determining the estimated ultimate losses. The Reported Loss Development (‘‘RLD’’) method is a common reserving method in which ultimate losses are estimated by applying a loss development factor to actual loss experience. This method fully utilizes actual experience. Multiplication of underwriting year actual reported (or paid) losses by its respective development factor produces the estimated ultimate losses. The RLD method is based upon the assumption that the relative change in a given underwriting year’s losses from one evaluation point to the next is similar 81 to the relative change in prior underwriting years’ losses at similar evaluation points. In addition, this method is based on the assumption that the reserving and payment patterns as well as the claim handling procedures have not changed substantially over time. When a company has a sufficiently reliable loss development history, a development pattern based on the company’s historical indications may be used to develop losses to ultimate values. The BF reserving technique is commonly used for long-tailed or erratic lines. It in situations where the reported loss experience is relatively immature and/or lacks sufficient credibility for the application of methods that are more heavily reliant on emerged experience. The BF method is an additive IBNR method that combines into two pieces — expected reported (or paid) losses and expected unreported (or unpaid) losses. Expected unreported (unpaid) losses are added to the current actual reported (or paid) losses to produce an estimate of ultimate losses by underwriting year. The BF method introduces an element of stability that moderates the impact of inconsistent changes in paid and reported amounts. the ELR and RLD techniques by splitting the expected loss is also useful With the guidance of the methods above, actuarial judgment is applied in the determination of ultimate losses. In general, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, differing methods are utilized to estimate loss and loss adjustment expenses reserves in each segment. In the Diversiﬁed Reinsurance segment, as of December 31, 2012, 90.5% of the loss reserves in the Diversiﬁed Reinsurance segment are associated with the business acquired in the GMAC Acquisition (which includes new business written subsequent transaction). The Company’s executive and technical management, including claims and underwriting, have signiﬁcant experience with this book of business, which also has more than 25 years of loss experience associated with it. In general for the Diversiﬁed Reinsurance segment we utilize the ELR approach at the onset of reserving an account, the BF method for business with less but maturing loss experience, and as the experience matures the RLD Method. to that The Company has underwritten the AmTrust Quota Share Reinsurance segment since July 1, 2007. This segment consists of business written under the Reinsurance Agreement since that time, and commencing April 1, 2011, the business associated with the European Hospital Liability Quota Share. In addition, certain aspects of this segment are associated with recent acquisitions by AmTrust and while the underlying experience of the book has signiﬁcant seasoning, the combination of the shorter time frame with which the Company has direct experience with this business and the relative lack of experience the Company has with certain aspects of this business may result in a greater range of volatility. As a result, we have tended to rely on a weighted approach which primarily employs the RLD method for aspects of the segment with ample historical data, while also considering the ELR method for exposure resulting from recent acquisitions, or a relative business with a more limited level of experience. The Company’s actuarial analysis of this book of business is more reﬁned in that it utilizes a combination of monthly and quarterly data instead of contract period data in totality. As a result, a range of loss development factors are utilized due to the relative lack of seasoning of the underlying business as regards the Company’s experience. Because of the reﬁnement of the data, this allows for greater use of the loss development method earlier on in the maturity of the book than would ordinarily occur. Signiﬁcant Assumptions Employed in the Estimation of Reserve for Loss and Loss Adjustment Expenses The most signiﬁcant assumptions used as of December 31, 2012 to estimate the reserve for loss and loss adjustment expenses within the Company’s segments are as follows: 1. 2. 3. the information developed from internal and independent external sources can be used to develop meaningful estimates of the likely future performance of business bound by the Company; the loss and exposure information provided by ceding companies, insureds and brokers in support of their submissions can be used to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy; historic loss development and trend experience is assumed to be indicative of development and trends; and future loss 82 4. no signiﬁcant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur. The above four assumptions most signiﬁcantly inﬂuence the Company’s determination of initial expected loss ratios and expected loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for loss and loss adjustment expenses and are applicable to each of the Company’s business segments. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that these assumptions represent a realistic and appropriate basis for estimating the reserve for loss and loss adjustment expenses. Our reporting factors and expected loss ratios are based on a blend of our own experience, cedant experience and industry benchmarks. The benchmarks selected were those that we believe are most similar to our underwriting business. Factors Creating Uncertainty in the Estimation of the Reserve for Loss and Loss Adjustment Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for loss and loss adjustment expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, which are discussed in detail below. In addition, the Company’s reserves are subject to additional factors which add to the uncertainty of estimating reserve for loss and loss adjustment expenses. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating reserve for loss and loss adjustment expenses. The inherent uncertainty of estimating the Company’s reserve for loss and loss adjustment expenses increases principally due to: i. the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company; ii. the differing reserving practices among ceding companies; iii. iv. the diversity of contracts; and loss development patterns among different types of reinsurance treaties or the Company’s need to rely on its ceding companies for loss information, which also exposes the Company to changes in the reserving philosophy of the ceding company and the adequacy of its underlying case reserves. In order to verify the accuracy and completeness of the information provided to the Company by its the Company’s underwriters, actuaries, accounting and claims personnel ceding company counterparties, perform underwriting and claims reviews of the Company’s ceding companies. Any material ﬁndings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported loss and loss adjustment expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not the Company’s policy is to vigorously defend its position in litigation or arbitration. As of feasible, or involved 2012, December arbitration proceedings. the Company was any material litigation claims not 31, in Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss adjustment expense reserve estimates. As of December 31, 2012, there were no signiﬁcant backlogs related to the processing of policy or contract information in the Company’s segments. The Company assumes in its loss and loss adjustment expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies signiﬁcantly by line of business. This period can range from a few quarters for some 83 lines, such as property, to many years for some casualty lines of business. To the extent that actual reported losses are reported more quickly or more slowly than expected, the Company may adjust its estimate of ultimate loss. Potential Volatility in the Reserve for Loss and Loss Adjustment Expenses. In addition to the factors creating uncertainty in the Company’s estimate of loss and loss adjustment expenses, the Company’s estimated reserve for loss and loss adjustment expenses can change over time because of unexpected changes in the external environment. Potential changing external factors include: • • • • • • • • changes in the inﬂation rate for goods and services related to the covered damages; changes in the general economic environment frequency or severity; that could cause unanticipated changes in claim changes the potential plaintiffs; in litigation environment regarding the representation of plaintiffs and changes in the judicial and/or arbitration environment regarding the interpretation of policy and contract provisions relating to the determination of coverage and/or the amount of damages awarded for certain types of claims; changes in the social environment regarding the general attitude of juries in the determination of liability and damages; changes in the legislative environment regarding the deﬁnition of damages; new types of injuries caused by new types of injurious activities or exposures; and in the case of reporting patterns. assumed reinsurance, changes in ceding company case reserving and The Company’s estimates of reserve for loss and loss adjustment expenses can also change over time because of changes in internal company operations, such as: • • • alterations in claims handling procedures; growth in new lines of business where exposure and loss development patterns are not well established; or changes in the quality of risk selection or pricing in the underwriting process. Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss adjustment expense reserve estimates, ﬁnal claim settlements made by the Company may vary signiﬁcantly from the present estimates, particularly when those settlements may not occur until well into the future. In addition, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, the reasonably likely variance of our expected loss ratio for each segment varies commensurately with that experience. As of December 31, 2012, 89.6% of the loss reserves in the Diversiﬁed Reinsurance segment are associated with the business acquired in the GMAC Acquisition. The Company’s executive and technical management, including claims and underwriting, have signiﬁcant experience with this book of business, which also has more than 25 years of loss experience associated with it. We believe the possible variance of our expected loss ratio for all applicable loss years for the Diversiﬁed Reinsurance segment was approximately one percentage point as of December 31, 2012. If our ﬁnal loss ratio for the Diversiﬁed Reinsurance segment were to vary by approximately one percentage point from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $28.0 million. The Company has underwritten the AmTrust Quota Share Reinsurance segment since July 1, 2007. This segment consists of business written under the Reinsurance Agreement since that time, and commencing April 1, 2011, the business associated with the European Hospital Liability Quota Share. In addition, certain aspects of this segment are associated with recent acquisitions by AmTrust and while the underlying experience of the book has signiﬁcant seasoning, the combination of the shorter time frame with which the 84 Company has direct experience with this business and the relative inexperience of certain aspects of this business may result in a greater range of volatility in the reasonably likely variance of our expected loss ratio for all applicable loss years in the segment compared to the Diversiﬁed Reinsurance segment. We believe a possible variance of our expected loss ratio for all applicable loss years for the AmTrust Quota Share segment was approximately four percentage points as of December 31, 2012. If our ﬁnal loss ratio for the AmTrust Quota Share segment were to vary by four percentage points from the expected loss ratios in aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $101.1 million. The Company has underwritten the ACAC Quota Share segment since March 1, 2010. ACAC’s executive and technical management, including claims and underwriting, have signiﬁcant experience with this book of business, which also has more than 15 years of loss experience associated with it. In addition, our management has experience with this book of business when part of our business and ACAC were owned by GMAC. As a result, we believe the possible variance of our expected loss ratio for all applicable loss years for the ACAC Quota Share segment was approximately one percentage point as of December 31, 2012. If our ﬁnal loss ratio for the ACAC Quota Share segment were to vary by approximately one percentage point from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $6.5 million. Premiums and Commissions and Other Acquisition Expenses For pro-rata contracts and excess-of-loss contracts where no deposit or minimum premium is speciﬁed in the contract, written premium is recognized based on estimates of ultimate premiums provided by the ceding companies. Initial estimates of written premium are recognized in the period in which the underlying risks are incepted. Subsequent adjustments, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period in which they are determined. Reinsurance premiums assumed are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Contracts and policies written on a ‘‘losses occurring’’ basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a ‘‘risks attaching’’ basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period. Reinsurance premiums on specialty risk and extended warranty are earned based on the estimated program coverage period. These estimates are based on the expected distribution of coverage periods by contract at inception, because a single contract may contain multiple coverage period options and these estimates are revised based on the actual coverage period selected by the original insured. Unearned premiums represent the portion of premiums written which is applicable to the unexpired term of the contract or policy in force. These premiums can be subject to estimates based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period in which they are determined. The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the Company. Reporting delays are inherent in the reinsurance industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and commission and other acquisition expenses until it receives the cedants’ actual results. Under proportional treaties, which represented 82.0% of gross premiums written for the year December 31, 2012, the Company shares proportionally in both the premiums and losses of the cedant and pays the cedant a commission to cover the cedant’s acquisition expenses. Under this type of treaty, the Company’s ultimate premiums written and earned and acquisition expenses are not known at the inception of the treaty and must be estimated until results to the Company. Under non-proportional treaties, which represented 18.0% of gross premiums written for the year December 31, 2012, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a ﬁxed or minimum premium, which is subject to upward adjustment depending on the premium volume written by the cedant. reports its actual the cedant 85 Reported premiums written and earned and commission and other acquisition expenses on proportional treaties are generally based upon reports received from cedants and brokers, supplemented by the Company’s own estimates of premiums written and commission and other acquisition expenses for which ceding company reports have not been received. Premium and acquisition expenses estimates are determined at the individual treaty level. The determination of estimates requires a review of the Company’s experience with cedants, a thorough understanding of the individual characteristics of each line of business and the ability to project the impact of current economic indicators on the volume of business written and ceded by the Company’s cedants. Estimates for premiums and commission and other acquisition expenses are updated continuously as new information is received from the cedants. Differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined. Assessing whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written and is based, in part, on the use of actuarial and pricing models and assumptions. If we determine that a reinsurance contract does not transfer sufficient risk, we account for the contract as deposit liability. Commission and other acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of insurance and reinsurance business. Policy and contract commission and other acquisition expenses, including assumed commissions and other direct operating expenses are deferred and recognized as expense as related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs and believes they are fully recoverable. A premium deﬁciency at segment level is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition expenses and anticipated investment income exceed unearned premium. Fair Value of Financial Instruments The Company currently classiﬁes its ﬁxed maturity investments as AFS, other investments at fair value in accordance with FASB ASC Topic 944, ‘‘Financial Services’’ (‘‘ASC 944’’) and short-term investments as AFS. Pursuant to U.S. GAAP, these investments are carried at estimated fair value, with net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive (loss) income. FASB ASC Topic 820, ‘‘Fair Value Measurements and Disclosures’’ (‘‘ASC 820’’) deﬁnes fair value as the price to sell an asset or transfer a liability (i.e. the ‘‘exit price’’) in an orderly transaction between market participants. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: • • • Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a signiﬁcant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities, U.S. Treasury securities, and listed derivatives that are actively traded. Level 2 — Valuations based on quoted prices in active markets for similar assets or liabilities, quoted inputs are prices for identical assets or liabilities in inactive markets, or for which signiﬁcant observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Examples of assets and liabilities utilizing Level 2 inputs include: listed derivatives that are not actively traded; U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities (‘‘MBS’’) and asset-backed securities (‘‘ABS’’); short-duration high yield fund, and over-the-counter (‘‘OTC’’) derivatives (e.g. foreign currency options and forward contracts). Level 3 — Valuations based on models where signiﬁcant inputs are not observable. The unobservable inputs reﬂect our own assumptions about assumptions that market participants would use. Examples insurance and reinsurance derivative of assets and liabilities utilizing Level 3 inputs include: 86 contracts; hedge and credit funds with partial (‘‘CLO’’) — equity tranche securities that are traded in less liquid markets. transparency; and collateralized loan obligation The availability of observable inputs can vary from ﬁnancial instrument to ﬁnancial instrument and is affected by a wide variety of factors, including, for example, the type of ﬁnancial instrument, whether the ﬁnancial instrument is new and not yet established in the marketplace, and other characteristics particular to that valuation is based on models or inputs that are less observable or the transaction. To the extent unobservable in the market, the determination of fair value requires signiﬁcantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. We use prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassiﬁed between levels. For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in the Level 1 hierarchy. To date, we have only included U.S. government ﬁxed maturity instruments as level 1. The Company receives the quoted market prices from third party, nationally, recognized pricing services (‘‘Pricing Service’’). When quoted market prices are unavailable, the Company utilizes the Pricing Service to determine an estimate of fair value. The fair value estimates are included in the Level 2 hierarchy. The Pricing Service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash ﬂow and, when available, loan performance data. The Pricing Service’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare evaluations. In addition, the Pricing Service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The market inputs that the Pricing Service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The Company typically utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is Level 2 or Level 3 hierarchy. Approximately 98.3% and 97.7%, respectively of the Company’s ﬁxed maturity investments are categorized as Level 2 within the fair value hierarchy as of December 31, 2012 and 2011. At December 31, 2012 and 2011, we have not adjusted any pricing provided by the Pricing Services. the Company will If a fair value is challenged, The Company will challenge any prices for its investments which are not considered to represent fair value. typically obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought. As of December 31, 2012 and 2011, one security those dates, approximately and three securities, respectively, are valued using the market approach. At $26.1 million and $11.4 million, respectively or less than 1.0%. and 0.6%, respectively of Level 2 ﬁxed maturities, was priced using a quotation from a broker and/or custodian as opposed to the Pricing Service. At December 31, 2012 and 2011, we have not adjusted any pricing provided to us based on the review performed by our investment managers. To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. In addition, our process to validate the market prices obtained from the Pricing Service includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. We also periodically perform testing, as appropriate, of the market to determine trading activity, or lack of trading activity, as well as evaluating the variability of market prices. Securities sold during the quarter are also ‘‘back-tested’’ (i.e., the sales prices are compared to the previous month end reported market price to determine the reasonableness of the reported market price). There were no material differences between the prices from the Pricing Service and the prices obtained from our validation procedures as of December 31, 2012 and 2011. 87 At December 31, 2012 and 2011, the Company has no ﬁxed income investments that are guaranteed by third parties. We do not have any direct exposure to third party guarantors as of December 31, 2012 and 2011. U.S. Government and U.S. Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy. Non-U.S. government bonds: Comprised of bonds issued by non-U.S. governments and their agencies along with supranational organizations. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the signiﬁcant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government bonds are included in the Level 2 fair value hierarchy. Other mortgage-backed securities: Other mortgage-backed commercial mortgage-backed security (‘‘CMBS’’). This security is priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the signiﬁcant inputs used to price the CMBS are observable market inputs, the fair value of the CMBS is included in the Level 2 fair value hierarchy. consist bonds of a Corporate bonds: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate (‘‘LIBOR’’) yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker dealers. As the signiﬁcant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy. Municipal bonds: Municipal bonds comprise bonds and auction rate securities issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the signiﬁcant inputs used to price the municipal bonds are observable market inputs, municipals are classiﬁed within Level 2. Municipal auction rate securities are reported in the Consolidated Balance Sheets at cost which approximates their fair value. Other investments: The fair values of the investment in limited partnerships are determined by the fund manager based on recent ﬁlings, operating results, balance sheet stability, growth and other business and market sector fundamentals, and as such, the fair values are included in the Level 3 fair value hierarchy. Reinsurance balance receivable: The carrying values reported in the accompanying balance sheets for these ﬁnancial instruments approximate their fair value due to short term nature of the assets. Loan to related party: The carrying values reported in the accompanying balance sheets for these ﬁnancial instruments approximate their fair value. The underlying investments of the loan are generally priced by pricing services. As the signiﬁcant inputs used to price the underlying investments are observable market inputs, the fair values of Loan to related party are included in the Level 2 fair value hierarchy. Senior notes: The amount reported in the accompanying balance sheets for these ﬁnancial instruments represents the carrying value of the notes. The fair values are based on quoted prices of identical instruments 88 in inactive markets and as such, are included in the Level 2 hierarchy. At December 31, 2012, the fair value of the 2011 Senior Notes was $112.8 million and the fair value of the 2012 Senior Notes was $105.6 million. Junior subordinated debt: The amount reported in the accompanying balance sheets for these ﬁnancial instruments represents the carrying value of the debt. The fair value of the debt was derived using the Black-Derman-Toy model. As the fair value of the junior subordinated debt is determined using observable market inputs in the Black-Derman-Toy model, the fair value is included in the Level 2 fair value hierarchy. At December 31, 2012, the fair value of the debt was $166.9 million. Other-than-Temporary Impairment (‘‘OTTI’’) of Investments 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 limited to, the following: the facts and circumstances surrounding the underlying issuer including, but not • • • • • 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 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 noncredit (i.e., recoverable) impairment. There were no other-than-temporary impaired securities during the years ended December 31, 2012, 2011 and 2010. Goodwill and Intangible Assets The GMAC Acquisition and IIS Acquisition created certain assets separately described in our ﬁnancial statements as Goodwill and Intangible Assets, respectively. Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. Intangible Assets consist of ﬁnite and indeﬁnite life assets. Finite life intangible assets include customer and producer relationships and trademarks with useful life of 15 years. Insurance company licenses are considered indeﬁnite life intangible assets. ASC Topic 805, Business Combinations requires that the Company make an annual assessment as to whether the value of the Company’s goodwill and intangible assets are impaired. Impairment, which can be 89 either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill and intangible assets as of December 31, 2012 of $94.4 million. In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include an analysis of the Company’s share price relative to both its book value and its net income in addition to forecasts of future cash ﬂows and future proﬁts. Signiﬁcant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s ﬁnancial performance were to deteriorate signiﬁcantly, this could lead to an impairment of goodwill and intangible, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2012. Results of Operations The following table sets forth our selected Consolidated Statement of Income data for each of the periods indicated. For the Year Ended December 31, Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other insurance revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . . . . . . . . . . . . Commission and other acquisition expenses . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . Total underwriting income . . . . . . . . . . . . . . . . . . . . . . . . . . Other general and administrative expenses . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains on investments. . . . . . . . . . . . Junior subordinated debt repurchase expense. . . . . . . . . . . . . . . Accelerated amortization of junior subordinated debt discount and issuance cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gains (losses) . . . . . . . . . . . . . . . . . . . . . . . Interest and amortization expenses. . . . . . . . . . . . . . . . . . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income attributable to noncontrolling interests. . . . . . . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Maiden common shareholders. . . . Ratios Net loss and loss adjustment expense ratio* . . . . . . . . . . . . . . . Commission and other acquisition expense ratio**. . . . . . . . . . . General and administrative expense ratio*** . . . . . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio**** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $ 2,001.0 $ 1,901.3 $ 1,803.8 12.9 (1,262.3) (492.1) (43.6) 18.7 (10.2) 81.2 1.9 — 2011 ($ in Millions) $ 1,812.6 $ 1,723.5 $ 1,552.4 12.6 (1,043.1) (438.8) (40.3) 42.8 (13.6) 74.9 0.5 (15.1) $ — (4.4) 1.6 (36.4) (2.2) (0.1) (3.6) 46.5 69.5% 27.1% 2.9% 30.0% 99.5% $ (20.3) (5.0) 0.3 (34.1) (1.9) — — 28.5 66.6% 28.0% 3.5% 31.5% 98.1% 2010 $1,298.1 $1,227.8 $1,169.8 — (755.1) (336.7) (27.9) 50.1 (14.3) 71.6 6.6 — — (5.8) (0.5) (36.5) (1.3) — — 69.9 $ 64.6% 28.8% 3.5% 32.3% 96.9% * ** Calculated by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue. Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. 90 *** Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. **** Calculated by adding together net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio. Net Income 2012 vs. 2011 Net income attributable to Maiden common shareholders for the year ended December 31, 2012 was $46.5 million as compared to $28.5 million for the same period in 2011. In 2012, net income was reduced by $31.1 million due to the underwriting impact of Superstorm Sandy, which is net of applicable reinsurance and the Company’s provision for normalized catastrophe activity. The results in 2011 were adversely affected by non-recurring charges related to the 2011 Senior Note Offering which included $15.1 million of junior subordinated debt repurchase expense and $20.3 million of accelerated amortization of subordinated debt discount and issuance costs. The 2011 results also include $9.5 million in losses related to thunderstorm and tornado activity across the U.S. in the second quarter, net of the Company’s quarterly provisions for normalized catastrophe activity. Excluding the catastrophe losses in both 2012 and 2011, and the 2011 non-recurring charges, net income in 2012 increased to $77.6 million from $73.4 million in 2011, primarily as a result of improved investment income and investment and foreign exchange gains, which were partially offset by higher interest expenses and dividends on Preference Shares. 2011 vs. 2010 Net income attributable to Maiden common shareholders for the year ended December 31, 2011 was $28.5 million compared to $69.9 million for the same period in 2010. The lower result in 2011 was due to charges related to the 2011 Senior Note Offering which include $15.1 million of junior subordinated debt repurchase expense and $20.3 million of accelerated amortization of junior subordinated debt discount and issuance costs. The 2011 results reﬂect continued strong premium growth in all of the Company’s operating segments, offset by higher combined ratios in each of its segments. The 2011 results include $9.5 million in losses related to thunderstorm and tornado activity across the U.S. in the second quarter, net of the Company’s quarterly provisions for normalized catastrophe activity. In addition, the lower result reﬂects realized and unrealized gains on investments of $0.5 million in 2011 compared to realized and unrealized gains on investments of $6.6 million in 2010. We evaluate our business by segment, distinguishing between Diversiﬁed Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share segments. Net Premiums Written Comparison of Years Ended December 31, 2012 and 2011 Net premiums written increased by $177.8 million, or 10.3%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The table below compares net premiums written by segment for the years ended December 31, 2012 and 2011. For the Year Ended December 31, 2012 2011 Change in Total ($ in Millions) Diversiﬁed Reinsurance . . . . . . . . . . . $ 765.3 840.3 AmTrust Quota Share Reinsurance . . . . ACAC Quota Share . . . . . . . . . . . . . . 295.7 Total . . . . . . . . . . . . . . . . . . . . . . . . $1,901.3 % of Total Total ($ in Millions) 40.3% $ 798.0 669.3 44.2% 15.5% 256.2 100.0% $1,723.5 % of Total $ ($ in Millions) 46.3% $ (32.7) 171.0 38.8% 39.5 14.9% 100.0% $177.8 % (4.1)% 25.6% 15.4% 10.3% 91 The increase in net premiums written was primarily the result of the following: • • Growth on recurring business in the AmTrust Quota Share Reinsurance segment — The results for the year ended December 31, 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 $216.9 million or 34.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. 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 year ended December 31, 2012, net premiums written increased by $39.5 million or 15.4% compared to the year ended December 31, 2011, as ACAC continues to expand its business. These increases were offset by reductions in business written in the Diversiﬁed Reinsurance segment, primarily by Maiden US, which experienced a decrease in premiums written for the year ended December 31, 2012 of $17.3 million or 2.6% compared to December 31, 2011. In addition to writing fewer new accounts in 2012, Maiden US added a number of large proportional contracts in the second half of 2011 which had sizable in-force and unearned premiums assumed, which did not recur in 2012. Finally, several large proportional reinsurance contracts that no longer met Maiden US’ proﬁtability criteria were non-renewed, contributing to the decrease. Maiden Bermuda and IIS also decreased their written premium by $15.4 million or 12.0% during the year ended December 31, 2012 compared to December 31, 2011, largely due to non-renewals of certain accounts which were partially offset by new account activity. Comparison of Years Ended December 31, 2011 and 2010 Net premiums written increased by $495.7 million, or 40.4%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The table below compares net premiums written by segment for the years ended December 31, 2011 and 2010. For the Year Ended December 31, 2011 2010 Change in Total ($ in Millions) Diversiﬁed Reinsurance . . . . . . . . . . . $ 798.0 669.3 AmTrust Quota Share Reinsurance . . . . ACAC Quota Share . . . . . . . . . . . . . . 256.2 Total . . . . . . . . . . . . . . . . . . . . . . . . $1,723.5 % of Total Total ($ in Millions) 46.3% $ 554.1 468.0 38.8% 14.9% 205.7 100.0% $1,227.8 % of Total $ ($ in Millions) 45.1% $243.9 201.3 38.1% 50.5 16.8% 100.0% $495.7 % 44.0% 43.0% 24.5% 40.4% The increase in net premiums written was primarily the result of the following: • • • Premium from the IIS Acquisition. The IIS Acquisition was completed on November 30, 2010; IIS contributed $105.8 million for the year ended December 31, 2011 compared to $29.6 million for the year ended December 31, 2010. Continued underwriting discipline by Maiden US. Maiden US continues to maintain its underwriting discipline in the face of ongoing signiﬁcant market competition. However, Maiden US continues to see demand for its products and the year ended December 31, 2011, was successful in securing a series of new accounts and experienced strong organic growth, which resulted in increased premiums of $167.4 million, or 33.4% during the year. Growth in the AmTrust Quota Share Reinsurance segment premium. The commencement of the European Hospital Liability Quota Share increased premiums written by $95.3 million in the year ended December 31, 2011, while the business assumed under the Reinsurance Agreement increased $106.0 million in the year ended December 31, 2011. 92 • Growth in the ACAC Quota Share segment. 2011 includes a full year of results compared to only ten months in 2010, resulting in growth of $50.5 million or 24.5% for the year ended December 31, 2011 compared to 2010. Excluding the business associated with the European Hospital Liability Quota Share, $197.9 million or 49.4% of the increase in net premiums written for the year ended December 31, 2011 compared to the same period in 2010 was attributable to the automobile line of business, primarily personal auto. Net Premiums Earned Comparison of Years Ended December 31, 2012 and 2011 Net premiums earned increased by $251.4 million, or 16.2%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The table below compares net premiums earned by segment for the years ended December 31, 2012 and 2011. For the Year Ended December 31, 2012 2011 Change in Total ($ in Millions) Diversiﬁed Reinsurance . . . . . . . . . . . $ 795.3 727.8 AmTrust Quota Share Reinsurance . . . . ACAC Quota Share . . . . . . . . . . . . . . 280.7 Total . . . . . . . . . . . . . . . . . . . . . . . . $1,803.8 % of Total Total ($ in Millions) 44.1% $ 748.4 558.2 40.3% 15.6% 245.8 100.0% $1,552.4 % of Total $ ($ in Millions) 48.3% $ 46.9 169.6 35.9% 34.9 15.8% 100.0% $251.4 % 6.3% 30.4% 14.2% 16.2% The increase in net premiums earned was primarily the result of the following: • • • Growth in Maiden US business in the Diversiﬁed Reinsurance segment in 2011 — Continued underwriting discipline and strong organic premium written growth in 2011, particularly the second half of that year, resulted in increased earned premiums by Maiden US of $73.8 million or 12.3% during the year ended December 31, 2012, compared to the year ended December 31, 2011. This growth in earned premium was partially offset by slower premium written growth in 2012 in Maiden US as noted. Additionally, reduced writings by Maiden Bermuda and the Company’s international operations in 2011, as certain accounts reduced in size or were non-renewed, affected earned premium in 2012. 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 $49.4 million or 72.6% for the year ended December 31, 2012 compared to the year ended December 31, 2011, while the business assumed under the Reinsurance Agreement increased $120.2 million or 24.5% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Growth in the ACAC Quota Share segment — For the year ended December 31, 2012, net premiums earned increased by $34.9 million or 14.2% compared to the year ended December 31, 2011, as ACAC continues to expand its business. Comparison of Years Ended December 31, 2011 and 2010 Net premiums earned increased by $382.6 million, or 32.7%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The table below compares net premiums earned by segment for the years ended December 31, 2011 and 2010. For the Year Ended December 31, 2011 2010 Change in Total ($ in Millions) Diversiﬁed Reinsurance . . . . . . . . . . . $ 748.4 558.2 AmTrust Quota Share Reinsurance . . . . 245.8 ACAC Quota Share . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . $1,552.4 % of Total Total ($ in Millions) 48.3% $ 601.2 445.1 35.9% 123.5 15.8% 100.0% $1,169.8 % of Total $ ($ in Millions) 51.5% $147.2 113.1 38.0% 122.3 10.5% 100.0% $382.6 % 24.5% 25.4% 99.1% 32.7% 93 The increase in net premiums earned was primarily the result of the following: • • • full calendar year of the IIS Acquisition. The IIS Acquisition was completed on First November 30, 2010 and thus the year ended December 31, 2011 represents the ﬁrst full calendar year of operations for the business associated with the IIS Acquisition, which contributed $107.3 million of the overall increase in net premiums earned year ended December 31, 2011 compared to 2010. Growth in the AmTrust Quota Share Reinsurance segment premium. The commencement of the European Hospital Liability Quota Share on April 1, 2011 increased premiums earned by $68.1 million for the year ended December 31, 2011 while the business assumed under the Reinsurance Agreement increased $45.0 million for the year ended December 31, 2011 compared to the year ended December 31, 2010, respectively. Growth in the ACAC Quota Share segment. As noted, this new segment commenced on March 1, 2010 and thus the year ended December 31, 2011 represents a full year of operations compared to the year ended only ten months in 2010, contributing $122.3 million of December 31, 2011. the increase for Other Insurance Revenue Other insurance revenue represents the IIS Fee Business, which consists primarily of commissions on is not directly associated with premium revenue assumed by the the year ended December 31, 2012 compared to the year ended that German auto business produced, Company and increased 2.0% for December 31, 2011. Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments Comparison of Years Ended December 31, 2012 and 2011 Net Investment Income — Net investment income increased by $6.3 million or 8.4% for the year ended December 31, 2012 compared to the year ended December 31, 2011. The following table details the Company’s average invested assets and average book yield for the year ended December 31, 2012 compared to the year ended December 31, 2011. For the Year Ended December 31, Average invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average book yield* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 ($ in Millions) $2,764.6 $2,360.0 2.9% 3.2% * Ratio of net investment income over average invested assets, at fair value, including cash and cash equivalents and loan to related party. Despite the Company reducing the amount of cash held during 2012 and investing in longer term assets, the continuing decline in interest rates to historically low levels continue to reduce the Company’s overall portfolio yield. Despite the lower portfolio yields, the increase in net investment income for the year ended December 31, 2012 compared to the same period in 2011 is the result of the 17.1% growth in average invested assets. The growth in average invested assets during this period is the result of: 1) continued proﬁtable growth in the overall book of business in all segments as described herein; 2) strong positive cash ﬂow from operations during the year ended December 31, 2012; and 3) the issuance of the 2012 Senior Notes and the Preference Shares. As a result, despite the increase in average invested assets, the historically low interest rate environment has continued to limit the growth of investment income in the year ended December 31, 2012 compared to income in 2012 was additionally impacted negatively by increases in 2011. Growth in net prepayments agency mortgage-backed securities portfolio, resulting in increased levels of amortization of bond premiums by $5.1 million in 2012 compared to 2011. the Company’s U.S. government initially expected levels of in excess of investment 94 Net Realized and Unrealized Gains (Losses) on Investments — Net realized gains on investments were $1.9 million for the year ended December 31, 2012 compared to net realized and unrealized gains of $0.5 million for the year ended December 31, 2011, see ‘‘Liquidity and Capital Resources-Investments’’ on page 112 for further information. Comparison of Years Ended December 31, 2011 and 2010 Net Investment Income — Net investment income increased by $3.3 million, or 4.5%, for the year ended December 31, 2011 compared to the same period in 2010. For the Year Ended December 31, 2011 2010 ($ in Millions) Average invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,360.0 $2,080.6 Average book yield* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2% 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 combined with positive cash ﬂow from operations contributed to the growth in invested assets. Despite the Company’s premium growth and the increase in average invested assets, investment income grew at a slower rate in 2011 compared to 2010 reﬂecting: • • the continued signiﬁcant accumulation of cash and cash equivalents which occurred during 2011 and 2010 due largely to continuing strong operating cash ﬂow; and a continuing decline in the duration of the Company’s investment portfolio, brought about largely by an increase in prepayments in the Company’s mortgage-backed securities portfolio. Yields in ﬁxed income securities in general as well as in cash and cash equivalents have continued to be at historically low levels throughout 2011, resulting in downward pressure on yields as available cash is newly invested at lower rates than maturing securities previously yielded. Interest on the loan to AmTrust amounted to $1.9 million in 2011 compared to $2.0 million for the same period in 2010 due to a reduction in average 30 day LIBOR interest rates during 2011. Investment management fees and expenses of $3.5 million and $3.0 million were incurred during the year ended December 31, 2011 and 2010, respectively. Please refer to Liquidity and Capital Resources for a more detailed discussion of the Company’s investing position relative to the continuing accumulation of cash and cash equivalents, along with the Company’s operating and investing cash ﬂow results. Net Realized and Unrealized Gains (Losses) on Investments — Net realized and unrealized gains on investments were $0.5 million for the year ended December 31, 2011 compared to $6.6 million for the same period in 2010. In 2011, these were offset by $3.5 million in net unrealized losses on short sales of certain U.S. Treasury securities. For additional information on the Company’s investments and realized and unrealized gains and losses, please refer to Liquidity and Capital Resources. Net Loss and Loss Adjustment Expenses Comparison of Years Ended December 31, 2012 and 2011 Net loss and loss adjustment expenses increased by $219.2 million, or 21.0%, for the year ended December 31, 2012 compared to 2011. The net loss and loss adjustment expense ratios were 69.5% and 66.6% for the years ended December 31, 2012 and 2011, respectively. As noted, catastrophic losses increased the Company’s loss ratios in 2012 and 2011, particularly the Diversiﬁed Reinsurance segment, the result of Superstorm Sandy in 2012 and thunderstorm and tornado activity in the U.S. in the second quarter of 2011. These events increased the net loss and loss adjustment expense ratios by 1.7% and 0.6% in 2012 and 2011, respectively. Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 67.8% and 66.0% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were largely the result of poor performance on certain accounts, primarily in Maiden US. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and 95 the IIS Acquisition of $9.1 million for year ended December 31, 2012, compared to $28.9 million in 2011. The higher net loss and loss adjustment expense ratios occurred in the Diversiﬁed Reinsurance segment, in particular Maiden US and the ACAC Quota Share segment. Comparison of Years Ended December 31, 2011 and 2010 Net loss and loss adjustment expenses increased by $288.0 million, or 38.1%, for the year ended December 31, 2011 compared to the same period in 2010, primarily reﬂecting the continuing growth in the Company as a result of the commencement of the ACAC Quota Share in 2010 and the continuing growth of the AmTrust Quota Share in 2011 compared to 2010. The net loss and loss adjustment expense ratios were 66.6% and 64.6% for the years ended December 31, 2011 and 2010, respectively. The underwriting impact of U.S. storm activity in 2011 increased the net loss and loss adjustment expense ratio by 0.6 % in 2011. Without the storm losses, the Company’s net loss and loss adjustment expense ratio for the year ended December 31, 2011 would have been 66.0%, reﬂecting stable net loss and loss adjustment expense ratios in the Diversiﬁed Reinsurance segment as a result of the IIS Acquisition, offset by higher net loss and loss adjustment expense ratios in the AmTrust and ACAC segments. The total favorable development relating to the loss portfolio transfers since the closings of the GMAC Acquisition and the IIS Acquisition has been $68.9 million and the remaining $2.6 million is recorded as a deferred gain and is part of the Company’s reserve for loss and loss adjustment expenses at December 31, 2011 that are included in the accompanying Consolidated Balance Sheet. Included in the total favorable development were amortized gains from the loss portfolio acquired as part of the GMAC Acquisition and the IIS Acquisition, recorded as a reduction of losses incurred of $28.9 million and $25.3 million for the years ended December 31, 2011 and 2010, respectively. Commission and Other Acquisition Expenses Comparison of Years Ended December 31, 2012 and 2011 Commission and other acquisition expenses increased by $53.3 million, or 12.1%, for the year ended December 31, 2012 compared to 2011 due to the ongoing premium growth of the Company. However, the commission and other acquisition expense ratio decreased to 27.1% for the year ended December 31, 2012 compared to 28.0% in 2011, respectively. The reduced ratio largely reﬂects: (1) the impact of loss sensitive features on ceding commission in the Diversiﬁed Reinsurance segment, in particular business written by Maiden US, due to higher loss ratios in that segment; (2) continued growth and ongoing changes in the mix of business in the AmTrust Quota Share Reinsurance segment, including the impact of a full year of modiﬁcations to ceding commission made under the Reinsurance Agreement along with lower ceding commission and proﬁt share under the European Hospital Liability Quota Share, effective April 1, 2011 and discussed in further detail (3) modiﬁcations made to ceding commission made to the ACAC Quota Share effective October 1, 2012. in that segment’s results of operations; These changes were partially offset by the adoption of new accounting standards regarding the recognition of deferred commission and other acquisition expenses in the ﬁrst quarter of 2012 which increased commission and other acquisition expenses by $2.0 million for the year ended December 31, 2012 compared to 2011. Comparison of Years Ended December 31, 2011 and 2010 Commission and other acquisition expenses increased by $102.1 million, or 30.3%, for the year ended December 31, 2011 compared to the same period in 2010 due to the ongoing premium growth of the Company. However, the commission and other acquisition expense ratio decreased to 28.0% for the year ended December 31, 2011 compared to 28.8% for the same periods in 2010. This reﬂects the growth in earned premium offset by: (1) modiﬁcations to the ceding commission made under the Reinsurance Agreement; (2) lower ceding commissions under the European Hospital Liability Quota Share; and (3) a lower ceding commission under the ACAC Quota Share due to an increase in the loss ratio (under the loss sensitive feature of that segment’s reinsurance contract). 96 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 Year Ended December 31, General and administrative expenses − segments. . . . . . . . . General and administrative expenses − corporate . . . . . . . . Total general and administrative expenses . . . . . . . . . . . Comparison of Years Ended December 31, 2012 and 2011 2012 $43.6 10.2 $53.8 2011 ($ in Millions) $40.3 13.6 $53.9 2010 $27.9 14.3 $42.2 Total general and administrative expenses decreased by $0.1 million, or 0.2%, for the year ended December 31, 2012 compared to 2011. The general and administrative expense ratio is 2.9% for the year ended December 31, 2012 compared to 3.5% in 2011. The decrease for the year reﬂects the continuing growth of larger quota share accounts which enable the Company to operate more efficiently. The small decrease in total general and administrative expenses is primarily a result of decreases in office and technology expenses offset by increases in regulatory, legal and other professional fees. Comparison of Years Ended December 31, 2011 and 2010 Total general and administrative expenses increased by $11.7 million, or 27.8%, for the year ended December 31, 2011 compared to 2010. The general and administrative expense ratio was 3.5% for both years ended December 31, 2011 and 2010. The increase for the year reﬂects a full years expenses relating to the IIS Acquisition in November 2010 offset by reductions in non-recurring legal and professional expenses relating to the IIS Acquisition. The following represents the major factors contributing to the increase: • • • • Salary and employee welfare costs, including share compensation expense, increased approximately $7.9 million due to the 50 additional employees added in November 2010 as part of the IIS Acquisition; Legal, audit and other professional fees decreased by $1.1 million — decreases in fees, primarily legal, arising due to smaller number and scale non-recurring activities in 2011 offset partially by increases relating to additional overseas locations; Travel and office related expenses increased by $1.9 million, substantially all related to full years expenses relating to employees and offices acquired as part of the IIS Acquisition on November 30, 2010; and Other expenses, approximately $3.0 million. including regulatory, depreciation and technology expenses, increased in by Interest and Amortization Expense The interest and amortization expense for the years ended December 31, 2012, 2011 and 2010 comprises: For the Year Ended December 31, TRUPS Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Note Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comparison of Years Ended December 31, 2012 and 2011 2012 $21.4 15.0 $36.4 2011 ($ in Millions) $29.5 4.6 $34.1 2010 $36.5 — $36.5 The increase in interest and amortization expense for the year ended December 31, 2012 compared to the same period in 2011 was due to the issuance of 2012 Senior Notes during the ﬁrst quarter 2012. These increases were offset by savings in interest expense realized due to the repurchase on July 15, 2011 of 97 $107.5 million of the Junior Subordinated Debt, the repurchase of which was ﬁnanced with the issuance of 2011 Senior Notes. The weighted average interest rate was 11.7% for the year ended December 31, 2012 compared to 14.8% in 2011. Comparison of Years Ended December 31, 2011 and 2010 The decrease in interest and amortization expense for the year ended December 31, 2011 compared to the same period in 2010 was due to the repurchase on July 15, 2011 of $107.5 million of the TRUPS Offering which have a coupon of 14.0%, the repurchase of which was ﬁnanced with the issuance of the 2011 Senior Notes, which have a coupon of 8.25%. The weighted average interest rate was 14.8% for the year ended December 31, 2011 compared to 16.95% for the same period in 2010. Income Tax Expense The Company recorded a current income tax expense of $1.1 million, $0.6 million and $0.1 million for the years ended December 31, 2012, 2011 and 2010 respectively. These amounts relate to income tax on the earnings of its international subsidiaries and state taxes incurred by its U.S. subsidiaries. The effective rate of the years ended December 31, 2012, 2011 and current 2010, respectively. income tax was 1.9%, 2.1% and 0.2% for The Company recorded a deferred tax expense of $1.1 million, $1.3 million and $1.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. These amounts are related to the goodwill associated with the Company’s acquisition of its U.S. subsidiaries in the GMAC Acquisition. The effect of this expense will be reversed as: (1) we develop U.S. taxable income to permit recognition of the net deferred tax asset; and (2) the amortization period of the goodwill for tax purposes is exhausted. Dividends on Preference Shares Dividends on Preference Shares in 2012 cover the period from the date of issuance of the Preference Shares on August 22, 2012 to the date of the ﬁrst dividend payment which was December 17, 2012. Underwriting Results by Operating Segments The results of operations for our three segments, Diversiﬁed Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share are discussed below. Diversiﬁed Reinsurance Segment Results of this segment include the results of operations from the IIS Acquisition, which completed its ﬁrst full year of operations in 2011. The following table summarizes the underwriting results and associated ratios for the Diversiﬁed Reinsurance segment for the years ended December 31, 2012, 2011 and 2010: For the Year Ended December 31, Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . Other insurance revenue . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . . . . . . . . Commission and other acquisition expenses. . . . . . . . . . . . General and administrative expenses. . . . . . . . . . . . . . . . . Underwriting (loss) income . . . . . . . . . . . . . . . . . . . . Ratios Net loss and loss adjustment expense ratio . . . . . . . . . . . . Commission and other acquisition expense ratio. . . . . . . . . General and administrative expense ratio. . . . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $ 765.3 $ 795.3 12.9 (584.0) (203.2) (40.9) $ (19.9) 2011 ($ in Millions) $ 798.0 $ 748.4 12.6 (502.4) (200.2) (36.4) $ 22.0 2010 $ 554.1 $ 601.2 — (394.6) (152.7) (26.1) $ 27.8 72.3% 25.1% 5.1% 30.2% 102.5% 66.0% 26.3% 4.8% 31.1% 97.1% 65.6% 25.4% 4.4% 29.8% 95.4% 98 Comparison of Years Ended December 31, 2012 and 2011 The combined ratio increased to 102.5% for the year ended December 31, 2012 compared to 97.1% in 2011. As noted, catastrophic losses increased this segments combined ratios in 2012 and 2011, the result of Superstorm Sandy in 2012 and thunderstorm and tornado activity in the U.S. in the second quarter of 2011. These events increased the segment combined ratios by 3.6% and 1.2% in 2012 and 2011, respectively. Excluding losses from catastrophic events, combined ratios were 98.9% and 95.9% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were primarily the result of were largely the result of poor performance on certain accounts, primarily in Maiden US and were partially offset by a lower commission and other acquisition expense ratio as a result of reductions in ceding commission from loss sensitive contract features, primarily written by Maiden US. Premiums — Net premiums written decreased by $32.7 million, or 4.1%, the year ended December 31, 2012 compared to the same period in 2011. The table below illustrates net premiums written by line of business in this segment for the years ended December 31, 2012 and 2011: for For the Year Ended December 31, Net Premiums Written Property . . . . . . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . . . . . . Accident and Health . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . . . 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 24.8% $208.0 441.6 56.6% 42.6 4.9% 105.8 13.7% 100.0% $798.0 26.1% $(17.9) (8.3) 55.3% (5.3) 5.3% (1.2) 13.3% 100.0% $(32.7) (8.6)% (1.9)% (12.6)% (1.1)% (4.1)% Total ($ in Millions) $190.1 433.3 37.3 104.6 $765.3 The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2012 and 2011: For the Year Ended December 31, Net Premiums Earned Property . . . . . . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . . . . . . Accident and Health . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . . . 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 26.7% $197.0 395.5 55.9% 43.2 5.3% 112.7 12.1% 100.0% $748.4 26.3% $ 15.0 49.2 52.8% (1.2) 5.8% (16.1) 15.1% 100.0% $ 46.9 7.6% 12.4% (2.9)% (14.3)% 6.3% Total ($ in Millions) $212.0 444.7 42.0 96.6 $795.3 The reduction in premium written in the segment was primarily attributable to Maiden US, which experienced a decrease in premiums written for the year ended December 31, 2012 of $17.3 million or 2.6% compared to December 31, 2011. In addition to writing fewer new accounts in 2012, Maiden US added a number of large proportional contracts in the second half of 2011 which had sizable in-force and unearned premiums assumed, which did not recur in 2012. Finally, several large proportional reinsurance contracts that no longer met Maiden US’ proﬁtability criteria were non-renewed, further contributing to the decrease. Maiden Bermuda and IIS also decreased their written premium by $15.4 million or 12.0% during the year ended December 31, 2012 compared to December 31, 2011, largely due to non-renewals of certain accounts which were partially offset by new account activity. Despite the decrease in premiums written, strong organic premium written growth in 2011, particularly the second half of that year, resulted in increased earned premiums by Maiden US of $73.8 million or 12.3% during the year ended December 31, 2012, compared to the year ended December 31, 2011. This growth in earned premium was partially offset by slower premium written growth in 2012 in Maiden US as noted. 99 Additionally, reduced writings by Maiden Bermuda and the Company’s international operations, as certain accounts reduced in size or were non-renewed, affected earned premium in 2012. 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 2.0% for the year ended December 31, 2012, compared to December 31, 2011. Net Loss and Loss Adjustment Expenses — Net loss and loss adjustment expenses increased by $81.6 million, or 16.2%, for the year ended December 31, 2012 compared to 2011. Net loss and loss adjustment expense ratios were 72.3% and 66.0% for the years ended December 31, 2012 and 2011, respectively. As noted, catastrophic losses increased this segments net loss and loss adjustment expense ratios in 2012 and 2011, the result of Superstorm Sandy in 2012 and thunderstorm and tornado activity in the U.S. in the second quarter of 2011. These events increased the net loss and loss adjustment expense ratios by 3.6% and 1.2 % in 2012 and 2011, respectively. Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 68.7% and 64.8% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were largely the result of poor performance on certain accounts, primarily in Maiden US. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $9.1 million for year ended December 31, 2012, compared to $28.9 million in 2011. In addition to the lower amortized gains in 2012, the higher net loss and loss adjustment expense ratios were also impacted by higher current underwriting year loss ratios in both Maiden US and the international business written from the IIS Acquisition, in particular German Auto, as well as development from business written by Maiden Bermuda in prior years. Commission and Other Acquisition Expenses — Commission and other acquisition expenses increased by $3.0 million, or 1.5%, for the year ended December 31, 2012 compared to 2011. The increase during the year 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 commission and other acquisition expenses in the ﬁrst quarter 2012, commission and other acquisition expenses increased an additional $2.0 million during year ended December 31, 2012 compared to 2011. The implementation of this new accounting standard increased the commission and other ended ratio for December 31, 2012. segment by 0.3% for acquisition expense the year the These increases were offset by the impact of loss sensitive features on ceding commission in the segment, in particular business written by Maiden US, due to higher loss ratios in 2012 from the impact of both Superstorm Sandy and non-catastrophe underwriting results. For the year ended December 31, 2012, 54.8% of the Maiden US net premiums written have loss sensitive features, which results in lower ceding commissions when loss ratios increase. For the year ended December 31, 2012, the net effect of loss sensitive features on Maiden US reinsurance contracts reduced ceding commission by $10.4 million, compared to $10.7 million for the year ended December 31, 2011. Thus despite the increase in commission and other acquisition expenses in 2012 compared to 2011, the commission and other acquisition expense ratio decreased to 25.1% for the year ended December 31, 2012 compared to 26.3% in 2011. General and Administrative Expenses — Consistent with the Company’s growth, general and administrative expenses increased by $4.5 million, or 12.6%, for the year ended December 31, 2012 compared to 2011. The general and administrative expense ratio was 5.1% and 4.8% for the years ended December 31, 2012 and 2011, respectively. The overall expense ratio (including commission and other acquisition expenses) was 30.2% and 31.1% for the years ended December 31, 2012 and 2011, respectively. 100 Comparison of Years Ended December 31, 2011 and 2010 The combined ratio increased to 97.1% for the year ended December 31, 2011 compared to 95.4% in the same period ended 2010. As discussed previously, the 2011 results include the underwriting impact of U.S. storm activity, which increased the combined ratio by 1.2 % for the year ended December 31, 2011. Adjusted for the storm losses, the segment’s combined ratio for the year ended December 31, 2011 was 95.9% compared to 95.4% for the same period in 2010, reﬂecting a small deterioration in the loss ratios (as adjusted) in the segment. Premiums — Net premiums written increased by $243.9 million, or 44.0%, the year ended December 31, 2011 compared to the same period in 2010. The table below illustrates net premiums written by line of business in this segment for the years ended December 31, 2011 and 2010: for For the Year Ended December 31, Net Premiums Written Property . . . . . . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . . . . . . Accident and Health . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . . . 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 26.1% $168.9 311.9 55.3% 43.7 5.3% 29.6 13.3% 100.0% $554.1 30.5% $ 39.1 129.7 56.3% (1.1) 7.9% 76.2 5.3% 100.0% $243.9 23.1% 41.6% (2.4)% 257.1% 44.0% Total ($ in Millions) $208.0 441.6 42.6 105.8 $798.0 The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2011 and 2010: For the Year Ended December 31, Net Premiums Earned Property . . . . . . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . . . . . . Accident and Health . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . . . 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 26.3% $176.5 356.4 52.8% 62.9 5.8% 5.4 15.1% 100.0% $601.2 29.4% $ 20.5 39.1 59.3% (19.7) 10.5% 107.3 0.8% 100.0% $147.2 11.6% 11.0% (31.4)% 1,997.5% 24.5% Total ($ in Millions) $197.0 395.5 43.2 112.7 $748.4 The IIS Acquisition was completed on November 30, 2010 and the year ended December 31, 2011 represents the ﬁrst full year of operations, which accounted for $76.2 million of the increase in net premiums written. For the year ended December 31, 2011, approximately 68.1% of the net premiums written of the International line of business was Personal Automobile business associated with the IIS Acquisition. The remainder of the net premiums written in the International line of business was Credit Life business associated with the IIS Acquisition. Further, approximately 50.5% of the net premiums written in the International line of business originated in Germany. No other country in International exceeded 10% of net premiums written for the year ended December 31, 2011. In addition, the business written by Maiden US experienced strong growth in the year ended December 31, 2011 of $167.4 million or 33.4% compared to the same period in 2010, when certain accounts were not renewed or more premiums was retained by clients. A series of new accounts were successfully added in 2011, both quota share and excess of loss, accounting for the increase in this business. Other Insurance Revenue — Other insurance revenue of $12.6 million represents the IIS Fee Business is not directly associated with premium revenue generated by the Company. The year ended that December 31, 2011 represents the ﬁrst full calendar periods of operations for the IIS Fee Business and is primarily in respect of the German auto business produced by OVS. Net Loss and Loss Adjustment Expenses — Net loss and loss adjustment expenses increased by $107.8 million, or 27.3%, for the year ended December 31, 2011 compared to the same period in 2010. Net loss and loss adjustment expense ratios were 66.0% and 65.6% for the years ended December 31, 2011 and 101 2010, respectively. The underwriting impact of U.S. storm activity increased the net loss and loss adjustment expense ratio by 1.2% for the year ended December 31, 2011. Adjusted for the storm losses, the Company’s net loss and loss adjustment expense ratio for the year ended December 31, 2011 was 64.8%. The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition and the IIS Acquisition has been $68.9 million and the remaining $2.6 million is recorded as a deferred gain in the Company’s reserve for loss and loss adjustment expenses at December 31, 2011 that are included in the accompanying Consolidated Balance Sheet. Commission and Other Acquisition Expenses — Commission and other acquisition expenses increased by $47.5 million, or 31.1%, for the year ended December 31, 2011 compared to the same period in 2010, primarily reﬂecting the increased quota share business as a result of the ﬁrst full year of business from the IIS Acquisition, which typically has a higher ceding commission associated with that business. As a result, the commission and other acquisition expense ratio increased to 26.3% for the year ended December 31, 2011 compared to 25.4% for the same period in 2010. General and Administrative Expenses — General and administrative expenses increased by $10.3 million, or 39.2%, for the year ended December 31, 2011 compared to the same period in 2010. The general and administrative expense ratio was 4.8% and 4.4% for the years ended December 31, 2011 and 2010, respectively, primarily as a result of the ﬁrst full year of operations from the IIS Acquisition. The overall expense ratio (including commission and other acquisition expenses) was 31.1% and 29.8% for the years ended December 31, 2011 and 2010, respectively. AmTrust Quota Share Reinsurance Segment Effective April 1, 2011, the Company entered into a series of contract modiﬁcations with AmTrust including the ceding regarding the reinsurance coverage it provides under the Reinsurance Agreement, commission arrangements contained within that contract. These changes include: the (1) extension of Reinsurance 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, 2011 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%. the Company and AmTrust executed an amendment On March 7, 2013, after receipt of approval from each of the Company’s and AmTrust’s Audit Committee, to the Reinsurance Agreement, which provides for the extension of the term of the Reinsurance Agreement to July 1, 2016. The amendment further provides that, effective January 1, 2013, AII will receive a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission will remain 34.375%. Though this commission adjustment eliminates its variable feature, the Company anticipates operating for the foreseeable future at that commission rate. Lastly, with regards to the Specialty Program portion of Covered Business only, excluding workers’ compensation business included in the AmTrust’s Specialty Program segment from July 1, 2007 through December 31, 2012, AmTrust will be responsible for ultimate net loss otherwise recoverable from Maiden Bermuda to the extent that the loss ratio to Maiden Bermuda, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95%. Above and below the deﬁned corridor, the Company will continue to reinsure losses at its proportional 40% share per the Reinsurance Agreement. The Company believes that these contract revisions will help to maintain the stability of the overall performance for the Reinsurance Agreement. On April 1, 2011, the Company entered into a separate one-year 40% quota share agreement with AmTrust Europe Limited and AmTrust International Underwriters Limited to cover those entities medical liability business in Europe (‘‘European Hospital Liability Quota Share’’), substantially all of which is in Italy. The Company’s maximum limit of liability is €2 million 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 102 amounts computed. Pursuant to the terms of the European Hospital Liability Quota Share, the Company assumed the in-force and unearned premium as of April 1 which totaled $45.9 million. The business written is included in the Specialty Risk and Extended Warranty line of business in the under this agreement discussion that follows. As a result of the additional agreement with AmTrust, this segment has been renamed AmTrust Quota Share Reinsurance. Effective January 1, 2012, the European Hospital Liability Quota Share was amended, thereby increasing the maximum liability attaching to €10,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Furthermore, amendments were also made to the contract to expand the territorial scope to include new territories, speciﬁcally France. The following table summarizes the underwriting results and associated ratios for the AmTrust Quota Share Reinsurance segment for the years ended December 31, 2012, 2011 and 2010: For the Year Ended December 31, Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . . . . . . . . Commission and other acquisition expenses. . . . . . . . . . . . General and administrative expenses. . . . . . . . . . . . . . . . . Underwriting income . . . . . . . . . . . . . . . . . . . . . . . . Ratios Net loss and loss adjustment expense ratio . . . . . . . . . . . . Commission and other acquisition expense ratio. . . . . . . . . General and administrative expense ratio. . . . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $ 840.3 $ 727.8 (494.6) (200.6) (1.9) $ 30.7 2011 ($ in Millions) $ 669.3 $ 558.2 (380.3) (160.5) (2.3) $ 15.1 2010 $ 468.0 $ 445.1 (280.9) (144.7) (1.5) $ 18.0 68.0% 27.6% 0.2% 27.8% 95.8% 68.1% 28.8% 0.4% 29.2% 97.3% 63.1% 32.5% 0.3% 32.8% 95.9% Comparison of Years Ended December 31, 2012 and 2011 The combined ratio decreased to 95.8% for year ended December 31, 2012 compared to 97.3% in 2011, reﬂecting generally stable loss ratios and a lower commission and other acquisition expense ratio, which reﬂects ongoing changes in this segments mix of business and modiﬁcations to the Reinsurance Agreement’s ceding commission. Premiums — Net premiums written increased by $171.0 million, or 25.6%, the year ended December 31, 2012 compared to the same period in 2011. The results for the year ended December 31, 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 $216.9 million or 34.8% for the year ended December 31, 2012 compared to 2011. for During 2012, business written under the Reinsurance Agreement increased by $139.3 million or 24.3% compared to 2011 and this increase reﬂects AmTrust’s continuing expansion through acquisition and ongoing organic growth, both of which are beneﬁting from improved rate levels, particularly in workers’ compensation. Business written under the European Hospital Liability Quota Share increased by $31.8 million or 33.4% in 2012 compared to 2011, reﬂecting the ﬁrst full year of writings from that contract. 103 The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2012 and 2011. For the Year Ended December 31, Net Premiums Written Small Commercial Business. . . . . . . . . Specialty Program . . . . . . . . . . . . . . . Specialty Risk and Extended 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 43.3% $237.6 93.7 11.4% 35.5% $126.5 2.2 14.0% 53.3% 2.3% Total ($ in Millions) $364.1 95.9 Warranty . . . . . . . . . . . . . . . . . . . . 380.3 45.3% 338.0 50.5% 42.3 12.5% Total AmTrust Quota Share Reinsurance . . . . . . . . . . . . . . . . . $840.3 100.0% $669.3 100.0% $171.0 25.6% Net premiums earned increased by $169.6 million, or 30.4% for the year ended December 31, 2012, compared to the same period in 2011. The increase reﬂects the ongoing growth of business written under the Reinsurance Agreement and the European Hospital Liability Quota Share. The table below details net premiums earned by line of business for the years ended December 31, 2012 and 2011: For the Year Ended December 31, Net Premiums Earned Small Commercial Business. . . . . . . . . Specialty Program . . . . . . . . . . . . . . . Specialty Risk and Extended 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 43.0% $215.9 81.3 11.8% 38.7% $ 97.2 4.5 14.6% 45.0% 5.6% Total ($ in Millions) $313.1 85.8 Warranty . . . . . . . . . . . . . . . . . . . . 328.9 45.2% 261.0 46.7% 67.9 26.0% Total AmTrust Quota Share Reinsurance . . . . . . . . . . . . . . . . . $727.8 100.0% $558.2 100.0% $169.6 30.4% Net Loss and Loss Adjustment Expenses — Net loss and loss expenses increased by $114.3 million, or 30.1%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. Net loss and loss adjustment expense ratios were 68.0% and 68.1% for the years ended December 31, 2012 and 2011, respectively. Improved loss ratios in the workers’ compensation line of business within Small Commercial were largely offset by higher loss ratios in Specialty Program. The Specialty Risk and Warranty loss ratios were generally stable. Commission and Other Acquisition Expenses — Commission and other acquisition expenses increased by $40.1 million, or 24.9%, for the year ended December 31, 2012 compared to the same period in 2011. Expenses have increased in 2012 as a result of ongoing growth in earned premium under both the Reinsurance Agreement and the European Hospital Liability Quota Share. The commission and other acquisition expense ratio declined to 27.6% for the year ended December 31, 2012 compared to 28.8% in 2011. The change in both the expenses and ratio reﬂects the modiﬁcations to ceding commission made under the Reinsurance 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 $6.3 million for the year ended December 31, 2012, compared to $3.4 million for the year ended December 31, 2011. General and Administrative Expenses — General and administrative expenses decreased by $0.4 million, or 14.6%, for the year ended December 31, 2012 compared to the same period in 2011. The general and administrative expense ratio also decreased to 0.2% for the year ended December 31, 2012 compared to 0.4% for the year ended December 31, 2011. The overall expense ratio (including commission and other acquisition expenses) was 27.8% and 29.2% for the years ended December 31, 2012 and 2011, respectively, reﬂecting the changes in the commission and other acquisition expense ratio. 104 Comparison of Years Ended December 31, 2011 and 2010 The combined ratio increased to 97.3% for year ended December 31, 2011 as compared to 95.9% in 2010. The cause of the increase was due to an increase in the overall loss ratio, offset by a reduction in commissions as a result of a negotiated reduction in the ceding commission of 1.0% effective April 1, 2011, and the change in mix of business due to the commencement of the European Hospital Liability Quota Share. Premiums — Net premiums written increased by $201.3 million, or 43.0%, the year ended December 31, 2011 compared to 2010. For the year ended December 31, 2011, net premiums written for the European Hospital Liability Quota Share were $95.3 million. Excluding this new coverage, the net premiums written in the segment increased by $106.0 million or 22.6%, primarily due to continuing increases in each line of business. The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2011 and 2010. for For the Year Ended December 31, Net Premiums Written Small Commercial Business. . . . . . . . . Specialty Program . . . . . . . . . . . . . . . Specialty Risk and Extended 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 35.5% $197.0 73.9 14.0% 42.1% $ 40.6 19.8 15.8% 20.6% 26.8% Total ($ in Millions) $237.6 93.7 Warranty . . . . . . . . . . . . . . . . . . . . 338.0 50.5% 197.1 42.1% 140.9 71.5% Total AmTrust Quota Share Reinsurance . . . . . . . . . . . . . . . . . $669.3 100.0% $468.0 100.0% $201.3 43.0% Net premiums earned increased by $113.1 million, or 25.4% for the year ended December 31, 2011, compared to 2010. The increase in net premiums earned was primarily due to the commencement of the European Hospital Liability Quota Share effective April 1, 2011, which accounted for $68.1 million of the overall increased by $45.0 million or 10.1%. the net premiums earned in the segment increase. Excluding this new coverage, The table below details net premiums earned by line of business for the years ended December 31, 2011 and 2010: For the Year Ended December 31, Net Premiums Earned Small Commercial Business. . . . . . . . . Specialty Program . . . . . . . . . . . . . . . Specialty Risk and Extended 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 38.7% $202.7 71.6 14.6% 45.5% $ 13.2 9.7 16.1% 6.5% 13.5% Total ($ in Millions) $215.9 81.3 Warranty . . . . . . . . . . . . . . . . . . . . 261.0 46.7% 170.8 38.4% 90.2 52.8% Total AmTrust Quota Share Reinsurance . . . . . . . . . . . . . . . . . $558.2 100.0% $445.1 100.0% $113.1 25.4% The increase in earned premium reﬂects and is consistent with the growth in written premiums described above. Net Loss and Loss Adjustment Expenses — Net loss and loss expenses increased by $99.4 million, or 35.4%, for the year ended December 31, 2011 compared to 2010. Net loss and loss adjustment expense ratios were 68.1% and 63.1% for the years ended December 31, 2011 and 2010, respectively. The increase in the net loss and loss adjustment expense ratios reﬂects the ongoing shift in the mix of business to Specialty Risk and Extended Warranty under the Reinsurance Agreement and the European Hospital Liability Quota Share, which historically produce higher loss ratios than the other lines of business. 105 Commission and Other Acquisition Expenses — Commission and other acquisition expenses increased by $15.8 million, or 11.0%, for the year ended December 31, 2011 compared to 2010. The commission and other acquisition expense ratio declined to 28.8% for the year ended December 31, 2011 compared to 32.5% in 2010. The change in both the expenses and ratio reﬂects the modiﬁcations to ceding commission made under the Reinsurance 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 $3.4 million for the year ended December 31, 2011. Expenses have also increased in both periods as a result of ongoing growth in earned premium. General and Administrative Expenses — General and administrative expenses increased by $0.8 million, or 52.2%, for the year ended December 31, 2011 compared to 2010. The general and administrative expense ratio also increased to 0.4% for the year ended December 31, 2011 compared to 0.3% for the year ended December 31, 2010. The overall expense ratio (including commission and other acquisition expenses) was 29.2% and 32.8% for the years ended December 31, 2011 and 2010, respectively, reﬂecting the changes in the commission and other acquisition expense ratio. ACAC Quota Share Segment The following table summarizes the underwriting results and associated ratios for the ACAC Quota Share segment for the years ended December 31, 2012 and 2011 and for the period March 1 to December 31, 2010: For the Year Ended December 31, Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . . . . . . Commission and other acquisition expenses. . . . . . . . . . General and administrative expenses. . . . . . . . . . . . . . . Underwriting income . . . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expense ratio . . . . . . . . . . Commission and other acquisition expense ratio. . . . . . . General and administrative expense ratio. . . . . . . . . . . . Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $ $ 295.7 $ 280.7 (183.7) (88.3) (0.8) 7.9 65.5% 31.5% 0.2% 31.7% 97.2% 2011 ($ in Millions) $ 256.2 $ 245.8 (160.4) (78.1) (1.6) 5.7 65.3% 31.7% 0.7% 32.4% 97.7% $ 2010 $ $205.7 $123.5 (79.7) (39.3) (0.3) 4.2 64.5% 31.9% 0.2% 32.1% 96.6% Comparison of Years Ended December 31, 2012 and 2011 The combined ratio decreased to 97.2% for the year ended December 31, 2012 compared to 97.7% for the year ended December 31, 2011. In October 2012, ACAC incurred losses from Superstorm Sandy. Our share, net of inuring reinsurance, under the ACAC Quota Share was $2.0 million, which increased the net loss and loss adjustment expense ratio and combined ratio for the year ended December 31, 2012 by 0.7%. Excluding losses from Superstorm Sandy, the combined ratio decreased to 96.5% in 2012 from 97.7% in 2011. The cause of the decrease was a lower expense ratio in 2012, attributable in part to lower ceding commissions in 2012, the result of changes to the reinsurance agreement with ACAC discussed below. Effective October 1, 2012, the parties amended the reinsurance agreement to decrease the provisional ceding commission from 32.5% to 32.0% of ceded earned premium, net of premiums ceded by the personal to lines companies for adjustment to a minimum of 30.0% (changed from 30.5%), if the loss ratio is 64.5% or greater. The Company believes that the terms, conditions and pricing of the ACAC Quota Share have been determined by arm’s length negotiations and reﬂect current market terms and conditions. For the three months ended December 31, 2012, the effect of this contract amendment reduced ceded commission by $0.4 million. to adjustment. The ceding commission is subject inuring reinsurance, subject 106 Premiums — Net premiums written increased by $39.5 million, or 15.4% for the year ended December 31, 2012 compared to the year ended December 31, 2011. The table below details net premiums written by line of business in this segment for the years ended December 31, 2012 and 2011: For the Year Ended December 31, Net Premiums Written Automobile liability . . . . . . . . . . . . . . Automobile physical damage . . . . . . . . Total ACAC Quota Share . . . . . . . . . 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 54.1% $147.4 108.8 45.9% 100.0% $256.2 57.5% 42.5% 100.0% $12.5 27.0 $39.5 8.5% 24.8% 15.4% Total ($ in Millions) $159.9 135.8 $295.7 Net premium earned increased by $34.9 million, or 14.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011, as a result of the increase in premium written. The table below details net premiums earned by line of business in this segment for the years ended December 31, 2012 and 2011: For the Year Ended December 31, Net Premiums Earned Automobile liability . . . . . . . . . . . . . . Automobile physical damage . . . . . . . . Total ACAC Quota Share . . . . . . . . . 2012 % of Total 2011 % of Total Total ($ in Millions) Change in $ ($ in Millions) % 55.3% $141.2 104.6 44.7% 100.0% $245.8 57.4% 42.6% 100.0% $14.1 20.8 $34.9 10.0% 19.8% 14.2% Total ($ in Millions) $155.3 125.4 $280.7 Loss and Loss Adjustment Expenses — Net losses and loss expenses increased by $23.3 million or 14.5% for the year ended December 31, 2012 compared to December 31, 2011. As noted above, in October 2012, ACAC incurred losses from Superstorm Sandy. Our share, net of inuring reinsurance, under the ACAC Quota Share was $2.0 million, which increased the net loss and loss adjustment expense ratio for the year ended December 31, 2012 by 0.7%. Excluding losses from Superstorm Sandy, net loss and loss adjustment expense ratios decreased to 64.8% for the year ended December 31, 2012 compared to 65.3% for the year ended December 31, 2011. Commission and Other Acquisition Expenses — The ACAC Quota Share, as amended, provides that the reinsurers pay a provisional ceding commission equal to 32.0% of ceded earned premium, 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 years ended December 31, 2012 and 2011, the commission and other acquisition expense ratio of reﬂects the adjusted ceding commission recorded in addition to the respectively, 31.5% and 31.7%, U.S. Federal excise tax payable on this premium. Comparison of Years Ended December 31, 2011 and 2010 The ACAC segment commenced on March 1, 2010. As a result, comparability between the 2011 and 2010 periods is affected by the fact that 2010 only reﬂects ten months of results. The combined ratio increased to 97.7% for the year ended December 31, 2011 compared to 96.6% for the period ended December 31, 2010. The cause of the increase was due to an increase in the overall loss ratio to 65.3% for the period ended the year ended December 31, 2011 compared to 64.5% for December 31, 2010. 107 Premiums — Net premiums written increased by $50.5 million, or 24.5% for the year ended December 31, 2011 compared to the period ended December 31, 2010. The table below details net premiums written by line of business in this segment for the year ended December 31, 2011 and for the period from March 1 to December 31, 2010: For the Year Ended December 31, Net Premiums Written Automobile liability . . . . . . . . . . . . . . Automobile physical damage . . . . . . . . Total ACAC Quota Share . . . . . . . . . 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 57.5% $118.0 87.7 42.5% 100.0% $205.7 57.3% 42.7% 100.0% $29.4 21.1 $50.5 24.9% 24.0% 24.5% Total ($ in Millions) $147.4 108.8 $256.2 Net premium earned increased by $122.3 million, or 99.1% for the year ended December 31, 2011 compared to the period ended December 31, 2010. The table below details net premiums earned by line of business in this segment for the year ended December 31, 2011 and for the period from March 1 to December 31, 2010: For the Year Ended December 31, Net Premiums Earned Automobile liability . . . . . . . . . . . . . . Automobile physical damage . . . . . . . . Total ACAC Quota Share . . . . . . . . . 2011 % of Total 2010 Change in Total ($ in Millions) % of Total $ ($ in Millions) % 57.4% $ 69.5 54.0 42.6% 100.0% $123.5 56.3% $ 71.7 50.6 43.7% 100.0% $122.3 103.3% 93.8% 99.1% Total ($ in Millions) $141.2 104.6 $245.8 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 premium, 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 year ended December 31, 2011 and the period from March 1 to December 31, 2010, the commission and other acquisition expense ratio of 31.7% and 31.9%, respectively, reﬂects the adjusted ceding commission recorded in addition to the U.S. Federal excise tax payable on this premium. 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 BSCR. At December 31, 2012, the statutory capital and surplus of Maiden Bermuda was $942.8 million. Maiden Bermuda is currently determining its BSCR as of December 31, 2012 and we estimate that Maiden Bermuda will be allowed to pay dividends or distributions not exceeding $217.7 million. During 2012 and 2011, Maiden Bermuda did not pay any dividends to Maiden Holdings. 108 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 the states of Missouri and North Carolina, respectively, the states in which those subsidiaries are domiciled. In addition, there are restrictions based on risk-based capital a test which is the threshold that constitutes the authorized control level. If Maiden US’s 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. At December 31, 2012, Maiden US and Maiden Specialty statutory capital and surplus were $267.9 million and $46.2 million, respectively, in excess of its authorized control level. The inability of the subsidiaries of Maiden Holdings to pay dividends and other permitted distributions could have a material adverse effect on Maiden Holdings’ cash requirements and ability to make principal, interest and dividend payments on its debt, preference shares and common shares. During 2012 and 2011, Maiden US and Maiden Specialty paid no dividends. 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 and redemption of investments. Cash is used primarily to pay loss and loss adjustment expenses, general and administrative expenses and dividends, with the remainder made available to our investment managers for in accordance with our investment policy. A summary of cash ﬂows provided by (used in) investment operating, investing and ﬁnancing activities for the years ended December 31, 2012, 2011 and 2010 is as follows: For the Year Ended December 31, Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on foreign 2012 $ 319.1 (637.5) 208.8 2011 ($ in Millions) $181.3 13.3 (99.5) 2010 $ 151.6 (125.2) (37.2) currency cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 (3.1) (0.4) Total (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $(106.5) $ 92.0 $ (11.2) Cash Flows from Operating Activities Cash ﬂows from operations for the year ended December 31, 2012 were $319.1 million compared to $181.3 million for the year ended December 31, 2011. The increase in the amount of cash provided by operations in the year ended December 31, 2012 reﬂects the signiﬁcant growth in the Company during both 2011 and 2012, along with continuing proﬁtable combined ratios, despite the losses incurred by the Company in Superstorm Sandy. The Company’s assets grew by $743.1 million or 21.9% as of December 31, 2012 compared to December 31, 2011, primarily reﬂecting the operating cash ﬂows described, in addition to the issuance of the 2012 Senior Notes and the Preference Shares. Although the Company’s rate of premium growth has slowed in recent calendar quarters, the combination of expected 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. Cash ﬂows from operations for the year ended December 31, 2011 were $181.3 million compared to $151.6 million for the year ended December 31, 2010. Cash ﬂows from operations for the year ended December 31, 2011 were again strong due to continued positive underwriting results and reﬂect the continued overall growth of the Company in all segments. These positive factors were somewhat offset by the adverse net underwriting impact of second quarter 2011 U.S. thunderstorm and tornado activity totaling $9.5 million and lower growth in investment income during 2011. Cash Flows from Investing Activities Investing cash ﬂows consist primarily of proceeds from the sales and maturities of investments and payments for investments acquired. Net cash used in investing activities was $637.5 million during the year ended December 31, 2012 compared to $13.3 million provided by investing activities for the ended December 31, 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 109 quickly as investment conditions permit and to maintain, where possible, cash and cash equivalents 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 year ended December 31, 2012, the purchases of ﬁxed maturity securities exceeded the proceeds of sales, maturities and calls of such instruments by $619.2 million. Investing cash ﬂows consist primarily of proceeds on the sale or maturity of ﬁxed-maturity investments and payments for ﬁxed-maturity investments acquired. We generated $13.2 million in net cash from investing activities during the year ended December 31, 2011 compared to using $125.2 million for the year ended December 31, 2010. This change was the result of an increase from the Company’s mortgage-backed securities portfolio. in restricted cash balances and prepayments Cash Flows from Financing Activities Cash ﬂows provided by ﬁnancing activities were $208.8 million for the year ended December 31, 2012 compared to $99.5 million and $37.2 million used in the years ended December 31, 2011 and 2010, respectively. The following summarizes the net cash inﬂow (outﬂow) from ﬁnancing activities for the years ended December 31, 2012, 2011 and 2010. For the Year Ended December 31, Cash ﬂows from Financing Activities Senior notes issuance, net of issuance costs . . . . . . . . . . . . . . . Repayment of junior subordinated debt . . . . . . . . . . . . . . . . . . Preference shares − Series A issuance, net of issuance costs. . . . . Dividends paid to Maiden common shareholders . . . . . . . . . . . . Dividends paid on preference shares . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) ﬁnancing activities . . . . . . . . . Restrictions, Collateral and Speciﬁc Requirements 2012 2011 ($ in Millions) 2010 $ 96.6 — 145.0 (29.6) (3.6) 0.4 $208.8 $ 104.7 (107.5) — (20.9) — (75.8) $ (99.5) $ — — — (18.4) — (18.8) $(37.2) Maiden Bermuda is neither licensed nor admitted as an insurer, nor is it accredited as a reinsurer, in any jurisdiction in the U.S. 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 U.S. in order for U.S. ceding companies to obtain credit on their U.S. statutory ﬁnancial statements with respect to insurance liabilities ceded to them. Under applicable statutory 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. At this time, Maiden Bermuda uses trust accounts primarily to meet collateral requirements — cash and cash equivalents and investments pledged in favor of ceding companies in order to comply with relevant insurance regulations. 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 retains broad investment to achieve its business objectives while offering clients the additional security a discretion in order collateralized arrangement offers. We believe this offers the Company a signiﬁcant competitive advantage and improves the Company’s retention of high-quality clients. As a result of the transition of relationships as a result of the GMAC Acquisition, as of December 31, 2012 certain of these liabilities and collateralized arrangements are on the records of Maiden Bermuda while the remaining liabilities and collateralized arrangements are on the records of Maiden US. As of December 31, 2012, total cash and cash equivalents and ﬁxed maturity investments used as collateral were $2.2 billion compared to $1.6 billion as of December 31, 2011. The increase was primarily the AmTrust Quota Share attributable Reinsurance agreement. collateral provided increase assets the for as in to 110 The following table details additional information on those assets as of December 31, 2012 and 2011: December 31, Restricted Cash & Equivalents Maiden US . . . . . . . . . . . . . . . . . . . . Maiden Bermuda . . . . . . . . . . . . . . . . Diversiﬁed Reinsurance. . . . . . . . . . . Maiden Bermuda . . . . . . . . . . . . . . . . AmTrust Quota Share Reinsurance . . Maiden Bermuda . . . . . . . . . . . . . . . . ACAC Quota Share . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . As a % of Consolidated Balance $ 34.0 64.5 98.5 32.4 32.4 1.4 1.4 $132.3 2012 Fixed Maturities ($ in Millions) $ 722.7 398.3 1,121.0 824.6 824.6 89.4 89.4 $2,035.0 Restricted Cash & Equivalents Total $ 756.7 462.8 1,219.5 857.0 857.0 90.8 90.8 $2,167.3 $ 19.4 50.8 70.2 41.7 41.7 3.0 3.0 $114.9 2011 Fixed Maturities ($ in Millions) $ 624.4 368.4 992.8 419.5 419.5 59.0 59.0 $1,471.3 Total $ 643.8 419.2 1,063.0 461.2 461.2 62.0 62.0 $1,586.2 Sheet captions. . . . . . . . . . . . . . . . 100.0% 77.7% 78.8% 100.0% 72.8% 74.3% As part of the Reinsurance Agreement, Maiden Bermuda has also loaned funds to AmTrust totaling to satisfy collateral $168.0 million as of December 31, 2012 and December 31, 2011, requirements with AII. respectively, Collateral arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Both our trust accounts and 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 the closing of the IIS collateral requirements in the form of letters of credit and trust agreements. At Acquisition, the Company settled cash balances applicable to the subject reinsurance contracts with GMAC IICL of $26.2 million. Actual assets in support of the liabilities assumed under the IICL Agreement have been transferred to the Company when the subject individual agreements were novated to Maiden Bermuda.Until such time, under the funds withheld provisions of the IICL Agreement, the Company is fully credited for the investment income earned by the underlying assets which support the letters of credit and trust agreements GMAC IICL has provided to its ceding companies. As of December 31, 2012, one contract had not yet been novated and this is expected to occur in 2013. Maiden Bermuda now provides collateral in the form of both trusts and letters of credit as required by the respective reinsurance contracts. 111 The pre-existing funds withheld amounts (‘‘IIS Funds Withheld’’) and cash transferred to GMAC IICL are included in the Consolidated Balance Sheet as Funds Withheld. During 2011, the substantial majority of underlying reinsurance contracts were novated to Maiden Bermuda per the terms of the IICL Agreement. As of December 31, 2012 and December 31, 2011, the IIS Funds Withheld balance consisted of the following: December 31, Fixed maturities, at fair value . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Funds held on underlying business . . . . . . . . . . . . . . . Insurance balances receivable and other . . . . . . . . . . . . Total IIS Funds Withheld. . . . . . . . . . . . . . . . . . . . . Fair Value ($ in Millions) $26.4 0.1 0.5 (4.3) $22.7 2012 % of Total 116.4% 0.4% 2.3% (19.1)% 100.0% Fair Value ($ in Millions) $27.3 2.4 0.6 (6.0) $24.3 2011 % of Total 112.2% 10.1% 2.5% (24.8)% 100.0% The IIS Funds Withheld constituted 53.1% and 57.2% of the total funds withheld balance on the Company’s Consolidated Balance Sheets at December 31, 2012 and 2011, respectively. The ﬁxed maturity portfolio consists primarily of non-U.S. government debt, 100.0% of which is rated AAA as of December 31, 2012 and December 31, 2011. All corporate bonds held as of December 31, 2012 are investment grade securities. The ﬁxed maturities consisted of the following: December 31, U.K. government bonds . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value ($ in Millions) $20.0 6.4 26.4 2012 % of Total 75.7% 24.3% 100.0% Fair Value ($ in Millions) $27.3 — 27.3 2011 % of Total 100.0% —% 100.0% We do not have any non-U.S. government and government related obligations related to Greece, Ireland, Italy, Portugal or Spain as of December 31, 2012 and December 31, 2011. See the discussion in Counterparty Credit Risk in Item 7A of Part II of this Form 10-K 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 designated AFS with an orientation to generating current income. As of December 31, 2012, the weighted average duration of our ﬁxed maturity investment portfolio was 3.5 years and there were approximately $143.5 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 December 31, 2012 was higher as a result of an increased allocation to purchases of longer-duration corporate bonds during 2012, which were partially offset by continuing faster prepayments on its U.S. government agency bonds − mortgage-backed. 112 The Company’s AFS ﬁxed maturity investments increased by $598.0 million or 29.6% for the year ended December 31, 2012 compared to December 31, 2011, which was the result of: (1) the Company’s continued strong premium growth; (2) continuing proﬁtable combined ratios which have generated signiﬁcant positive cash ﬂow from operations; and (3) the issuance of the 2012 Senior Notes and the Preference Shares. The table below shows the aggregate amounts of our invested AFS assets and other investments at fair value including the average yield and duration at December 31, 2012 and December 31, 2011: December 31, 2012 Original or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses ($ in Millions) Fair Value Average yield* Average duration Available-for-sale securities U.S. treasury bonds . . . . . . . . . . . . . . $ U.S. agency bonds − mortgage-backed . . . . . . . . . U.S. agency bonds − other . . . . . . . . . . Non-U.S. government bonds . . . . . . . . Other mortgage-backed securities . . . . . Corporate bonds . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . Total available-for-sale 42.7 $ 1.2 $ — $ 43.9 1.9% 1.2 years 962.6 11.7 55.2 23.1 1,247.3 132.6 31.0 1.4 2.2 0.9 113.5 1.2 (1.4) — — — (6.5) — 992.2 13.1 57.4 24.0 1,354.3 133.8 2.6% 2.5 years 4.4% 4.8 years 1.8% 2.9 years 2.8% 3.8 years 4.6% 4.8 years 0.8% 0.7 years 3.5% 3.5 years ﬁxed maturities . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . 2,475.2 2.6 Total investments . . . . . . . . . . . . . $2,477.8 151.4 0.4 $151.8 (7.9) (0.1) $(8.0) 2,618.7 2.9 $2,621.6 December 31, 2011 Original or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses ($ in Millions) Fair Value Average yield* Average duration Available-for-sale securities U.S. treasury bonds . . . . . . . . . . . . . . $ U.S. agency bonds − mortgage-backed . . . . . . . . . U.S. agency bonds − other . . . . . . . . . . Non-U.S. government bonds . . . . . . . . Other mortgage-backed securities . . . . . Corporate bonds . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . Total available-for-sale 44.2 $ 1.8 $ — $ 46.0 1.8% 2.1 years 928.9 10.4 52.5 9.9 742.9 168.3 43.3 0.6 0.1 — 47.7 0.7 (0.1) — (0.3) — (30.2) — 972.1 11.0 52.3 9.9 760.4 169.0 3.4% 2.7 years 2.6% 1.6 years 1.1% 2.7 years 2.7% 1.6 years 4.8% 3.5 years 0.7% 0.5 years 3.6% 2.8 years ﬁxed maturities . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . 1,957.1 2.0 Total investments . . . . . . . . . . . . . $1,959.1 94.2 0.3 $94.5 (30.6) (0.1) $(30.7) 2,020.7 2.2 $2,022.9 * income for each sub-component of Average yield is calculated by dividing annualized investment available-for sale securities (including amortization of premium or discount) by amortized cost and therefore does not income earned on cash and cash equivalents or other short-term investments. include investment 113 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 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 OCI, as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e., recoverable) impairment. During the years ended December 31, 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 December 31, 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 December 31, 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 Consolidated Statements of Income. For the years ended December 31, 2012, 2011 and 2010, the Company recorded realized (losses) gains respectively. As of that would be classiﬁed as from these trading activities of $(1.6) million, $0.8 million and $(1.5) million, December 31, 2012, the Company had no open positions, trading activities. long or short, 114 The following table presents information regarding our available-for-sale securities and other investments that were in an unrealized loss position at December 31, 2012 and December 31, 2011, and split by the length of time the assets are in a continuous unrealized loss position: December 31, 2012 Available-for-sale securities: U.S. agency bonds − mortgage-backed . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . Total temporarily impaired AFS Less Than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses ($ in Millions) Total Fair Value Unrealized Losses $158.6 94.7 253.3 — $(1.4) (1.1) (2.5) — $ — 141.9 141.9 2.0 $ — (5.4) (5.4) (0.1) $158.6 236.6 395.2 2.0 $(1.4) (6.5) (7.9) (0.1) securities and other investments . . $253.3 $(2.5) $143.9 $(5.5) $397.2 $(8.0) As of December 31, 2012, there were approximately 32 securities in an unrealized loss position with a fair value of $397.2 million and unrealized losses of $8.0 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 $143.9 million and unrealized losses of $5.5 million. December 31, 2011 Available-for-sale securities: U.S. agency bonds − mortgage-backed . . . . . . . . Non-U.S. government bonds. . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . Total temporarily impaired AFS Less Than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses ($ in Millions) Total Fair Value Unrealized Losses $ 30.4 43.6 227.4 301.4 1.2 $(0.1) (0.3) (7.4) (7.8) (0.1) $ — — 125.1 125.1 — $ — — (22.8) (22.8) — $ 30.4 43.6 352.5 426.5 1.2 $ (0.1) (0.3) (30.2) (30.6) (0.1) securities and other investments . . $302.6 $(7.9) $125.1 $(22.8) $427.7 $(30.7) As of 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 $22.8 million. The following table summarizes the fair value by contractual maturity of our AFS ﬁxed maturity investment portfolio as of December 31, 2012 and 2011: December 31, 2012 2011 Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through ﬁve years . . . . . . . . . . . . . . . . . Due after ﬁve years through ten years . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . . . . . . . . . . . Commercial mortgage-backed securities . . . . . . . . . . . . . . . . Total AFS securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($ in Millions) 58.7 $ 387.9 981.5 174.4 1,602.5 992.2 24.0 $2,618.7 115 % of Total 2.2% $ ($ in Millions) 54.3 299.9 14.8% 502.9 37.5% 6.7% 181.6 61.2% 1,038.7 972.1 37.9% 9.9 0.9% 100.0% $2,020.7 % of Total 2.7% 14.8% 24.9% 9.0% 51.4% 48.1% 0.5% 100.0% As of December 31, 2012 and 2011, 98.6% and 99.1%, respectively, of our ﬁxed income portfolio consisted of investment grade securities. We deﬁne a security as being below-investment grade if it has an S&P credit rating of BB+ or less. The following table summarizes the composition of the fair value of our ﬁxed maturity investments at the dates indicated by ratings as assigned by S&P (and/or other rating agencies when S&P ratings were not available): December 31, 2012 Ratings U.S. treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 Ratings U.S. treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost Fair Value % of Total Fair Value ($ in Millions) $ 42.7 974.3 171.1 186.5 477.2 587.9 35.5 $2,475.2 $ 43.9 1,005.3 184.0 196.7 515.4 637.1 36.3 $2,618.7 1.7% 38.4% 7.0% 7.5% 19.7% 24.3% 1.4% 100.0% Amortized Cost Fair Value % of Total Fair Value ($ in Millions) $ 44.2 939.3 160.3 151.0 327.8 316.1 18.4 $1,957.1 $ 46.0 983.1 161.9 153.3 328.4 330.2 17.8 $2,020.7 2.3% 48.6% 8.0% 7.6% 16.3% 16.3% 0.9% 100.0% Substantially all the Company’s U.S. government agency securities holdings are mortgage-backed bonds. Additional details on the mortgage-backed bonds component of our U.S. government agency bonds portfolio as of December 31, 2012 and 2011 are as follows: December 31, 2012 2011 Mortgage-backed securities Residential mortgage-backed (RMBS) GNMA − ﬁxed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . FNMA − ﬁxed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . FNMA − variable rate . . . . . . . . . . . . . . . . . . . . . . . . . . FHLMC − ﬁxed rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLMC − variable rate . . . . . . . . . . . . . . . . . . . . . . . . Total RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total agency mortgage-backed securities . . . . . . . . . . . . . . Non-MBS ﬁxed rate agency securities . . . . . . . . . . . . . . . . Total U.S. agency bonds. . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value ($ in Millions) $ 100.8 573.0 46.9 257.7 13.8 992.2 992.2 13.1 $1,005.3 % of Total Fair Value ($ in Millions) % of Total 10.0% $185.3 487.3 57.0% 77.8 4.7% 221.7 25.6% — 1.4% 972.1 98.7% 972.1 98.7% 11.0 1.3% 100.0% $983.1 18.8% 49.6% 7.9% 22.6% —% 98.9% 98.9% 1.1% 100.0% 116 The following table provides a summary of changes in fair value associated with the Company’s U.S. government agency bonds — mortgage-backed portfolio for the years ended December 31, 2012 and 2011: December 31, U.S. agency bonds − mortgage-backed: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and paydowns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains (losses) on sales − included in net income . . . . . . . . . . . Change in net unrealized (gains) losses − included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of bond premium and discount . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 ($ in Millions) $ 972.1 481.9 (438.8) (1.3) (11.3) (10.4) $ 992.2 $ 969.5 264.8 (283.5) 4.2 22.4 (5.3) $ 972.1 The Company continued to experience elevated levels of paydowns of its U.S. government agency mortgage-backed bond portfolio for the year ended December 31, 2012, compared to the December 31, 2011. The increased paydowns reﬂect the ongoing decline in interest rates in the U.S. and globally in recent years, resulting in higher reﬁnancing activity in the U.S. mortgage markets. This market environment was reinforced during the 2012 when the U.S. Federal Reserve enacted new policy measures designed to provide greater liquidity to certain credit markets, in particular the mortgage-backed securities market. These measures may, combined with an already low interest rate environment, have the effect of increasing the level of paydowns on certain mortgage-backed securities in the Company’s portfolio, consequently increasing the amount of amortization of bond premium we have incurred. 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. Our U.S. government agency mortgage-backed bond portfolio is 37.9% of our ﬁxed maturity investments as of December 31, 2012. Given the relative size of this portfolio to our total investments, if these faster prepayment patterns continue over an extended period of time, this could potentially have the effect of limiting the growth in our investment income, or in certain circumstances, or even potentially reducing the total amount of investment income we earn. The Company holds no asset-backed securities other than the mortgage-backed securities it has described herein. During 2012, the Company increased its holdings in investment-grade corporate bonds to: (1) offset accelerating prepayment patterns in its agency MBS portfolio which had reduced both portfolio duration and yield; (2) take advantage of higher yielding securities while maintaining asset quality; and (3) provide greater balance to its ﬁxed maturity holdings. Security holdings by sector and ﬁnancial strength rating by S&P in this asset class as of December 31, 2012 and 2011 are as follows: December 31, 2012 Corporate bonds Financial Institutions . . . . . Industrials. . . . . . . . . . . . . Utilities/Other . . . . . . . . . . Total Corporate bonds . . . AAA AA+, AA, AA- Ratings* A+, A, A- BBB+, BBB, BBB- B+ or lower % of Corporate bonds portfolio Fair Value ($ in Millions) 7.1% —% —% 7.1% 5.2% 1.2% —% 6.4% 31.1% 4.8% 0.9% 36.8% 13.7% 30.8% 2.5% 47.0% 0.1% $ 775.1 520.9 1.7% 0.9% 58.3 2.7% $1,354.3 57.2% 38.5% 4.3% 100.0% 117 December 31, 2011 Corporate bonds Financial Institutions . . . . . Industrials. . . . . . . . . . . . . Utilities/Other . . . . . . . . . . Total Corporate bonds . . . AAA AA+, AA, AA- Ratings* A+, A, A- BBB+, BBB, BBB- B+ or lower 7.5% —% —% 7.5% 2.6% 3.1% —% 5.7% 36.8% 4.3% —% 41.1% 22.1% 19.0% 2.3% 43.4% 0.8% —% 1.5% 2.3% % of Corporate bonds portfolio 69.8% 26.4% 3.8% 100.0% Fair Value ($ in Millions) $531.1 199.9 29.4 $760.4 * Ratings as assigned by S&P As noted, during the year ended December 31, 2012, the Company increased its allocation to investment grade corporate bonds, in particular sectors other than the Financial Institutions sector. These purchases have marginally increased the duration of the Company’s AFS ﬁxed maturity portfolio as of December 31, 2012. The Company has also increased its allocation to corporate bonds with credit ratings of BBB, in order to take advantage of more attractive yield opportunities in those bonds, while staying within its established investment guidelines. The Company’s 10 largest corporate holdings, all of which are in the Financial Institutions sector, as of December 31, 2012 as carried at fair value and as a percentage of all ﬁxed income securities are as follows: December 31, 2012 Morgan Stanley FLT, Due 10/18/2016(1) . . . . . . . . . . . . . . . . . . Citigroup FLT, Due 6/9/2016(1) . . . . . . . . . . . . . . . . . . . . . . . . Northern Rock Asset Mgt., 3.875% Due 11/16/2020. . . . . . . . . . BNP Paribas, Due 1/15/2021 . . . . . . . . . . . . . . . . . . . . . . . . . Rabobank Nederland UTREC, 3.875% Due 2/8/2022 . . . . . . . . . Barclays Bank PLC NY FLT, Due 2/24/2020(1) . . . . . . . . . . . . . SLM Corp FLT, Due 1/27/2014(1) . . . . . . . . . . . . . . . . . . . . . . Bear Stearns FLT, 11/21/2016(1) . . . . . . . . . . . . . . . . . . . . . . . JPMorgan Chase & Co FLT, Due 6/13/2016(1). . . . . . . . . . . . . . HSBC Financial FLT, Due 6/1/2016(1) . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratings as assigned by S&P * (1) Securities with the notation FLT are ﬂoating rate securities. % of Holdings Based on Fair Value of All Fixed Income Securities 1.5% 1.0% 1.0% 0.9% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 9.0% Fair Value ($ in Millions) $ 38.0 25.5 25.1 22.5 21.5 20.0 19.8 19.7 19.4 19.4 $230.9 Rating* A- BBB+ AAA A+ AA- A+ BBB- A A A As of December 31, 2012 and 2011, 17.5% and 33.0% of its corporate securities were ﬂoating rate securities, respectively, all of which were in the Financial Institutions sector. These securities enable the Company to maintain ﬂexibility in the face of volatile ﬁxed income market conditions and to quickly take advantage of any unanticipated increases in interest rates which may occur. Given the Company’s status as a Bermuda domicile with limited U.S. Federal tax exposure, to the extent that the Company invests in ﬁxed maturity securities issued by U.S. state and local governments, these investments are made on the merits of the underlying investment and not on the tax-exempt status of those securities under U.S. Federal tax law. As a result, as of December 31, 2012 and 2011, municipal securities only composed 5.1% and 8.4% of the Company’s ﬁxed maturity portfolio, respectively. 118 As of December 31, 2012 and 2011, we own the following securities not denominated in U.S. dollars: December 31, Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. government bonds. . . . . . . . . . . . . . . . . . . . Total non-U.S. dollar AFS securities . . . . . . . . . . . . . Fair Value ($ in Millions) $156.5 57.4 $213.9 2012 % of Total 73.1% 26.9% 100.0% Fair Value ($ in Millions) $ 65.7 52.3 $118.0 2011 % of Total 55.7% 44.3% 100.0% The increase in these assets held during 2012 is primarily the result of funds relating to the European Hospital Liability Quota Share, which incepted on April 1, 2011 and under which the Company provides collateral which is denominated in Euro. These securities were invested in the following currencies: December 31, Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Swedish Krona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australian Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . British Pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-U.S. dollar AFS securities . . . . . . . . . . . . . Fair Value ($ in Millions) $191.7 10.9 7.7 2.9 0.7 $213.9 2012 % of Total 89.6% 5.1% 3.6% 1.4% 0.3% 100.0% Fair Value ($ in Millions) $107.2 9.9 — 0.9 — $118.0 2011 % of Total 90.8% 8.4% —% 0.8% —% 100.0% We do not have any non-U.S. government and government related obligations of Greece, Ireland, Italy, Portugal and Spain as of December 31, 2012 and 2011. As of December 31, 2012 and 2011, 90.1% and 90.4% of the Company’s non-sovereign government issuers were rated AA or higher by S&P. The four largest non-U.S. government issuers held by the Company as of December 31, 2012 and 2011 are: December 31, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European Investment Bank. . . . . . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-U.S. government bonds . . . . . . . . . . . . . . . Fair Value ($ in Millions) $24.8 12.5 6.1 5.9 8.1 $57.4 2012 % of Total 43.1% 21.7% 10.7% 10.3% 14.2% 100.0% Fair Value ($ in Millions) $28.6 — 8.8 6.4 8.5 $52.3 2011 % of Total 54.6% —% 16.8% 12.2% 16.4% 100.0% For corporate bonds not denominated in U.S. dollars, the following table summarizes the composition of the fair value of our ﬁxed maturity investments at the dates indicated by ratings as assigned by S&P and/or other rating agencies when S&P ratings were not available: December 31, AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB-. . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-U.S. dollar denominated corporate bonds . . Fair Value ($ in Millions) $ 61.8 7.9 52.3 33.1 1.4 $156.5 2012 % of Total 39.5% 5.0% 33.4% 21.1% 1.0% 100.0% Fair Value ($ in Millions) $22.7 13.1 7.8 22.1 — $65.7 2011 % of Total 34.5% 20.0% 11.9% 33.6% —% 100.0% 119 The Company does not employ any credit default protection against any of the ﬁxed maturities held in non-U.S. denominated currencies. Reserve for Loss and Loss Adjustment Expenses The Company establishes loss reserves to cover the estimated liability for the payment of all loss and loss adjustment expenses incurred with respect to premiums earned on the contracts that the Company writes. Loss reserves do not represent an exact calculation of the liability. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. The Company believes that the recorded unpaid loss and loss adjustment expenses represent management’s best estimate of the cost to settle the ultimate liabilities based on information available at December 31, 2012. As of December 31, 2012 and 2011, the Company recorded gross reserves for unpaid loss and loss adjustment expenses of $1.7 billion and $1.4 billion, respectively, and net reserves for unpaid loss and loss adjustment expenses of $1.6 billion and $1.4 billion, respectively. The following table provides a reconciliation of the net reserves for unpaid loss and loss adjustment expenses for the years ended December 31, 2012, 2011 and 2010: For the Year Ended December 31, Gross unpaid loss and loss adjustment expenses reserves at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reinsurance recoverable at beginning of period . . . . . . Net loss and loss adjustment expense reserves at beginning 2012 2011 ($ in Millions) 2010 $ 1,398.4 20.3 $1,226.8 6.7 $1,002.7 8.4 of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,378.1 1,220.1 994.3 Net incurred losses related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net paid losses related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired loss and loss expense reserve . . . . . . . . . . . . . . . Effect of foreign exchange movement . . . . . . . . . . . . . . . . Net loss and loss adjustment expense reserves at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance recoverable at end of period . . . . . . . . . . . . . . Gross unpaid loss and loss adjustment expenses reserves 1,239.0 23.3 1,262.3 1,028.9 14.2 1,043.1 (485.0) (530.3) (1,015.3) — 4.3 (456.1) (423.9) (880.0) 0.4 (5.5) 788.0 (32.9) 755.1 (365.3) (266.0) (631.3) 102.0 — 1,629.4 110.9 1,378.1 20.3 1,220.1 6.7 at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,740.3 $1,398.4 $1,226.8 See Business — Reserve for Loss and Loss Adjustment Expenses in Item 1 of Part I of this Report, Critical Accounting Policies and Estimates — Reserve for Loss and Loss Adjustment Expenses and Results of Operations above for a discussion of loss and loss adjustment expenses and prior years’ reserve developments. Financial Strength Ratings Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. Some of our reinsurance treaties contain special funding and termination clauses that are triggered in the event that we or one of our subsidiaries is downgraded by one of the major rating agencies to levels speciﬁed in the treaties, or our capital is signiﬁcantly reduced. If such an event were to happen, we would be required, in certain instances, to post collateral in the form of letters of credit and/or trust accounts against existing outstanding losses, if any, related to the treaty. In a limited number of instances, the subject treaties 120 could be cancelled retroactively or commuted by the cedant and might affect our ability to write business. Our principal operating subsidiaries are rated ‘‘A-’’ (Excellent) with a stable outlook by A.M. Best, which rating is the fourth highest of sixteen rating levels and BBB+ (Good) with a stable outlook by S&P, which is the eighth highest of twenty-two rating levels. Our 2011 Senior Notes and 2012 Senior Notes are both rated BBB- by S&P and the Preference Shares are rated BB by S&P. Other Material Changes in Financial Position The following summarizes other material changes in the ﬁnancial position of the Company as of December 31, 2012 and 2011: December 31, 2012 2011 ($ in Millions) Reinsurance balances receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance Recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . Deferred commission and other acquisition expenses. . . . . . . . . . . . . . . Reserve for loss and loss adjustment expenses . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 522.6 38.7 110.9 270.7 (1,740.3) (936.5) $ 423.4 35.4 20.3 248.4 (1,398.4) (832.0) In general, the increases in these balances reﬂect the continued growth of the Company, in particular in 2012 in both the AmTrust Quota Share Reinsurance segment and the ACAC Quota Share segment, including a full year of business under the European Hospital Liability Agreement. At December 31, 2012, the reinsurance recoverable increased by $90.6 million compared to 2011, of which $79.7 million or 71.9% relates to reinsurance claims from Superstorm Sandy. Capital Resources Capital resources consist of funds deployed or available to be deployed in support of our business operations. Our total capital resources at December 31, 2012 and 2011 were as follows: December 31, Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maiden shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of debt to total capital resources. . . . . . . . . . . . . . . . . . . . . . . 2012 2011 ($ in Millions) $ 207.5 126.3 1,015.2 $1,349.0 $ 107.5 126.3 768.6 $1,002.4 24.7% 23.3% As of December 31, 2012, our shareholders’ equity was $1,015.2 million, a 32.1% increase compared to $768.6 million as of December 31, 2011. In addition to the issuance of the 2012 Senior Notes and the Preference Shares described previously, the remainder of the increase was due primarily to net income for the year ended December 31, 2012 of $46.5 million and the increase in unrealized gains on investments of $79.9 million offset by common dividends declared of $23.9 million, and an unfavorable foreign currency translation adjustment of $2.9 million. On August 22, 2012, the Company issued 6 million of 8.25% Preference Shares-Series A, par value $0.01 per share, at $25 per share. The Company received net proceeds of $145.0 million from the offering, The net proceeds from the offering are expected to be used for continued support and development of our reinsurance business and for other general corporate purposes, which may include repurchasing the Company’s outstanding common shares and repurchasing the Company’s outstanding 14% 30-year trust preferred securities issued in January 2009. Also on that date, the Company’s Board of Directors authorized management at its discretion to purchase its outstanding common shares in an amount not exceeding 50% of the net proceeds of the Preference Share Offering. Repurchases under the program may be made in open market or privately negotiated transactions or otherwise, from time to time, depending on market conditions. On December 24, 2012, Maiden Holdings adopted a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the 121 ‘‘Exchange Act’’), to facilitate the repurchase of its common shares in accordance with Maiden’s existing share repurchase authorization. For the period August 22, 2012 through December 31, 2012, the Company did not repurchase any of its common shares. Senior Note Offerings 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 overallotment 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 Senior Notes to be redeemed plus accrued and unpaid interest to but excluding the redemption date. The net proceeds from the 2011 Senior Note Offering were approximately $104.7 million, after deducting the underwriting discount and 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 year ended December 31, 2011, the Company incurred a non-recurring call premium charge of approximately $15.1 million. The Company 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. These charges have decreased the shareholders’ equity as of December 31, 2011 by $35.4 million. Our shareholders’ equity is expected to increase in the future from interest expense savings that will result from the 2011 Senior Note Offering. 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. Junior Subordinated Debt On January 20, 2009, the Company established a special purpose trust for the purpose of issuing trust preferred securities. This involved private placement of 260,000 units (the ‘‘Units’’), each Unit consisting of $1,000 principal amount of capital securities (the ‘‘Trust Preferred Securities’’) of Maiden Capital Financing Trust (the ‘‘Trust’’) and 45 common shares, $.01 par value, of the Company, for a purchase price of $1,000.45 per Unit. As part of the transaction, the Company issued 11,700,000 common shares to the purchasers of the Trust Preferred Securities. The Trust Preferred Securities mature in 2039 and carry an interest rate of 14% and an effective rate of interest of 16.76%. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested by the trusts in subordinated debentures issued by the Company. The gross proceeds to the Company were approximately $260.1 million in the form of junior subordinated debt, before approximately $4.3 million of placement agent fees and expenses. 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 December 31, 2012 and 2011, the unamortized amount carried as a reduction of the Company’s liability for the junior subordinated debt was $26.2 million in both periods. If the Company were to repay the 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. 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 we were to fully pay off the remaining securities prior to January 20, 2014, we would incur $21.4 million in additional expenses along with (as noted above) incurring additional amortization 122 charges to write off the remaining unamortized amounts which are presently $26.2 million. Thus our results of operations and book value would be reduced commensurately. Although the Company has sufficient liquidity at this time to pay off the remaining securities associated with the TRUPS Offering, given the proximity to the expiration of that date, it is unlikely that we would pay off these securities prior to January 20, 2014 unless were able to achieve savings in excess of the remaining interest we are required to pay until that time, including any prepayment premium. At such time that we do pay off the remaining securities associated with the TRUPS Offering, we will incur a charge for the remaining unamortized amounts Aggregate Contractual Obligations In the normal course of business, the Company is a party to a variety of contractual obligations as summarized below. These contractual obligations are considered by the Company when assessing its liquidity requirements and the Company is conﬁdent in its ability to meet all of its obligations. The Company’s aggregate contractual obligations as of December 31, 2012 are summarized as follows: December 31, 2012 Contractual Obligations Operating lease obligations. . . . . . . Junior subordinated debt and interest. . . . . . . . . . . . . . . . Senior notes and interest . . . . . . . . Reserve for loss and loss Payment Due by Period Total Less than 1 Year 1 − 3 Years ($ in Millions) 3 − 5 Years More than 5 Years $ 5.6 $ 2.0 $ 2.6 $ 1.0 $ — 713.0 694.3 21.4 16.9 42.7 33.7 42.7 33.7 606.2 610.0 350.9 adjustment expenses. . . . . . . . . . 1,740.3 548.9 571.8 268.7 Other investments − unfunded commitments . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . 3.1 $3,156.3 1.0 $590.2 2.1 $652.9 — $346.1 — $1,567.1 The amounts included for reserve for loss and loss adjustment expenses reﬂect the estimated timing of expected loss payments on known claims and anticipated future claims as of December 31, 2012. Both the amount and timing of cash ﬂows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, to ‘‘Critical Accounting Policies — Reserve for Loss and Loss Adjustment Expenses’’. Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ signiﬁcantly from those disclosed. Total estimated obligations will be funded by existing cash and investments. refer Currency and Foreign Exchange We conduct business in a variety of foreign (non-U.S.) currencies, the principal exposures being the Euro, the British pound, the Australian dollar, the Canadian dollar, the Swedish krona and the Russian ruble. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. 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. Our principal exposure to foreign currency risk is our obligation to settle claims in foreign currencies. In addition, in order to minimize this risk we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than the U.S. dollar. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be reduced by ﬂuctuations in foreign currency exchange rates could materially adversely affect our ﬁnancial condition and results of operations. At December 31, 2012, no such hedges or hedging strategies were in force or had been entered into. We measure monetary assets and liabilities denominated in foreign currencies at year 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 at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income. 123 Net foreign exchange gains amounted to $1.6 million during the year ended December 31, 2012 compared to $0.3 million during the year ended December 31, 2011 and losses of $0.5 million during the year ended December 31, 2010. Effects of Inﬂation The effects of inﬂation are considered implicitly in pricing and estimating reserves loss and loss adjustment 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 loss and loss adjustment 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 December 31, 2012, we did not have any off-balance sheet arrangements as deﬁned by Item 303(a)(4) of Regulation S-K. Recent Accounting Pronouncements See Item 8, Note 2 to the Consolidated Financial Statements for a discussion on recently issued accounting pronouncements. 124 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk that we will incur losses in our investments due to adverse changes in market rates and prices. Market risk is directly inﬂuenced by the volatility and liquidity in the market in which the related underlying assets are invested. We believe that we are principally exposed to two types of market risk: changes in interest rates and changes in credit quality of issuers of investment securities and reinsurers. Interest Rate Risk Interest rate risk is the risk that we may incur economic losses due to adverse changes in interest rates. The primary market risk to the investment portfolio is interest rate risk associated with investments in ﬁxed maturity securities. Fluctuations in interest rates have a direct impact on the market valuation of these securities. At December 31, 2012, we had ﬁxed maturity securities with a fair value of $2.6 billion that are subject to interest rate risk. The table below summarizes the interest rate risk associated with our ﬁxed maturity securities by illustrating the sensitivity of the fair value and carrying value of our ﬁxed maturity securities as of December 31, 2012 to selected hypothetical changes in interest rates, and the associated impact on our shareholders’ equity. Temporary changes in the fair value of our ﬁxed maturity securities that are held as AFS do impact the carrying value of these securities and are reported in our shareholders’ equity as a component of other comprehensive income. The selected scenarios in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value and carrying value of our ﬁxed maturity securities and on our shareholders’ equity, as of December 31, 2012: Hypothetical Change in Interest Rates Fair Value Estimated Change in Fair Value Hypothetical % (Decrease) Increase in Shareholders’ Equity 200 basis point increase . . . . . . . . . . . . . . . . . . 100 basis point increase . . . . . . . . . . . . . . . . . . No change . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decrease . . . . . . . . . . . . . . . . . . 200 basis point decrease . . . . . . . . . . . . . . . . . . $2,418.2 2,514.3 2,618.7 2,727.1 2,845.2 $(200.5) (104.4) — 108.4 226.5 (19.7)% (10.3)% —% 10.7% 22.3% ($ in Millions) The interest rate sensitivity on the $168.0 million loan to related party which carries an interest rate of one month LIBOR plus 90 basis points, an increase of 100 and 200 basis points in LIBOR would increase our earnings and cash ﬂows by $1.7 million and $3.4 million, respectively, on an annual basis, but would not affect the carrying value of the loan. Counterparty Credit Risk The concentrations of the Company’s counterparty credit risk exposures have not changed materially compared to December 31, 2011. The Company has exposure to credit risk primarily as a holder of ﬁxed income securities. The Company controls this exposure by emphasizing investment grade credit quality in the ﬁxed income securities it purchases. The table below summarizes the credit ratings by major rating category of the Company’s ﬁxed maturity investments as of December 31 for each of the years presented: For the Year Ended December 31, Ratings* AA+ or better . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA, AA-, A+, A, A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 48.0% 26.3% 24.3% 1.4% 100.0% 60.1% 22.7% 16.3% 0.9% 100.0% * Ratings as assigned by S&P 125 The Company believes this high quality concentration reduces its exposure to credit risk on ﬁxed income investments to an acceptable level. At December 31, 2012, the Company is not exposed to any signiﬁcant credit concentration risk on its investments, excluding securities issued by the U.S. governments which are rated AA+ (see Investments in Item 7 of Part II of this Annual Report on Form 10-K), with the single largest corporate issuer and the top 10 total ﬁxed income corporate securities, respectively. accounting for only 1.5% and 9.0% of the Company’s issuers The Company is subject to the credit risk of its cedants in the event of their insolvency or their failure to honor the value of the funds held balances due to the Company for any other reason. However, the Company’s credit risk in some jurisdictions is mitigated by a mandatory right of offset of amounts payable by the Company to a cedant against amounts due to the Company. In certain other jurisdictions the Company is able to mitigate this risk, depending on the nature of the funds held arrangements, to the extent that the Company has the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by the Company to cedants for losses payable and other amounts contractually due. Funds held balances for which the Company receives an investment return based upon either the results of a pool of assets held by the cedant or the investment return earned by the cedant on its investment portfolio are exposed to an additional layer of credit risk. The IIS Funds Withheld account due to the Company is related to one cedant, GMAC IICL, whereby GMAC IICL and the Company entered into the IICL Agreement to assume business written by GMAC IICL. Under the IICL Agreement, the individual balances by cedant which comprise the IIS Funds Withheld account have been transferred to the Company upon novation of the underlying reinsurance contract from GMAC IICL to the Company. As of December 31, 2012, one contract had not yet been novated and this is expected to occur in 2013. At December 31, 2012, the IIS Funds Withheld account due from GMAC IICL was $22.7 million, including $26.4 million in a segregated investment portfolio which represents collateral pledged as required by the underlying reinsurance contracts offset by other net liabilities of $4.3 million. The investments underlying the IIS Funds Withheld account are maintained in separate investment portfolios by GMAC IICL and managed by the Company. The Company is subject to the credit risk of this cedant in the event of insolvency or GMAC IICL’s failure to honor the value of the funds held balances for any other reason. However, the Company’s credit risk is somewhat mitigated by the fact that the Company generally has the right to offset any shortfall in the payment of the funds held balances with amounts owed by the Company to the cedant for losses payable and other amounts contractually due. The Company has exposure to credit risk as it relates to its business written through brokers if any of the Company’s brokers is unable to fulﬁll their contractual obligations with respect to payments to the Company. In addition, in some jurisdictions, if the broker fails to make payments to the insured under the Company’s policy, the Company might remain liable to the insured for the deﬁciency. The Company’s exposure to such credit risk is somewhat mitigated in certain jurisdictions by contractual terms. See Business and Risk Factors in Item 1 and 1A of Part I of this Annual Report on Form 10-K, respectively, for detailed information on three brokers that accounted for approximately 34.1% of the Company’s gross premiums written in the Diversiﬁed Reinsurance segment for the year ended December 31, 2012. The Company has exposure to credit risk as it relates to its reinsurance balances receivable and reinsurance recoverable on paid and unpaid losses. We are subject to the credit risk that AII and/or AmTrust will fail to perform their obligations to pay interest on and repay principal of amounts loaned to AII pursuant to its loan agreement with Maiden Bermuda, and to reimburse Maiden Bermuda for any assets or other collateral of Maiden that AmTrust’s U.S. insurance company subsidiaries apply or retain, and income on those assets. Reinsurance balances receivable from the Company’s clients at December 31, 2012 were $522.6 million, including balances both currently due and accrued. The Company believes that credit risk related to these balances is mitigated by several factors, including but not limited to, credit checks performed as part of the underwriting process and monitoring of aged receivable balances. In addition, as the vast majority of its reinsurance agreements permit the Company the 126 right to offset reinsurance balances receivable from clients against losses payable to them, the Company believes that the credit risk in this area is substantially reduced. Provisions are made for amounts considered potentially uncollectible. There was no allowance for uncollectible reinsurance balances receivable at December 31, 2012. The Company purchases limited amounts of retrocessional reinsurance and requires its reinsurers to have adequate ﬁnancial strength. The Company evaluates the ﬁnancial condition of its reinsurers and monitors its concentration of credit risk on an ongoing basis. Provisions are made for amounts considered potentially uncollectible. The balance of reinsurance recoverable on unpaid losses was $110.9 million at December 31, 2012. This balance is elevated as a result of $79.7 million in estimated reinsurance recoverable on unpaid losses from reinsurers as a result of Superstorm Sandy, almost exclusively on business written by Maiden Specialty. As at December 31, 2012, 88.4% of the reinsurance recoverable on unpaid losses was due from reinsurers with credit ratings from A.M Best of A, or better, 11.3% due from reinsurers with credit ratings of A- and the remaining 0.3% of the reinsurance recoverable was primarily due from state pools. Foreign Currency Risk Through its international reinsurance operations, the Company conducts business in a variety of non-U.S. currencies, with the principal exposures being the Euro and British pound. As the Company’s reporting the Company’s currency is the U.S. dollar, Consolidated Financial Statements. foreign exchange rate ﬂuctuations may materially impact The Company is generally able to match foreign currency denominated assets against its net reinsurance liabilities both by currency and duration to protect the Company against foreign exchange and interest rate risks. However, a natural offset does not exist for all currencies. For the year ended December 31, 2012, 9.4% of our net premiums written and 9.6% of our reserve for loss and loss adjustment expenses were transacted in the Euro. Countries that participate in the Euro have experienced signiﬁcant economic uncertainty in recent years, which continues through the present time. These circumstances are the cumulative result of the effect of excessive sovereign debt, deﬁcits by numerous participating countries in the Euro, uncertainty regarding the monetary policies of the EU and their underlying funding mechanisms and poor economic growth and prospects for the EU as a whole. While economic policy measures and commitments did stabilize the currency’s volatility in the second half of 2012, the EU’s ﬁscal outlook remains negative, and permanent solutions to resolve these issues by participating countries and other institutions to reduce debt levels of EU members and improve its economic outlook have not been resolved. While not likely at this time, without satisfactory and timely resolution of these issues, the collapse or modiﬁcation of the Euro cannot be ruled out at this time, with further uncertainty as to what forms of currency would take its place. As a result, we could be exposed to signiﬁcantly greater foreign currency exposure than we estimate at this time. If the currency were impaired or disrupted to any signiﬁcant degree, it could also impact our ability to conduct normal business operations in those participating countries. We may employ various strategies to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be reduced by ﬂuctuations in foreign currency exchange rates and could materially adversely affect our ﬁnancial condition and results of operations. At December 31, 2012, no hedging instruments have been entered into. Our principal foreign currency exposure is to the Euro and British pound, however assuming all other variables remain constant and disregarding any tax effects, a strengthening (weakening) of the U.S. dollar exchange rate of 10% or 20% relative to the non-U.S. currencies held by the Company would result in a decrease (increase) in the Company’s net assets of $15.9 million and $31.8 million, respectively. 127 Item 8. Financial Statements and Supplementary Data. See our Consolidated Financial Statements and notes thereto and required ﬁnancial statement schedules commencing on pages F-1 through F-56 and S-1 through S-7 below. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures In connection with the preparation of this Report, our management has performed an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as deﬁned in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2012, our Company’s disclosure controls and procedures were effective. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting as deﬁned in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and for the assessment of the effectiveness of internal control over ﬁnancial reporting. As deﬁned by the SEC, internal control over ﬁnancial reporting is a process designed by, or under the supervision of, our principal executive and principal ﬁnancial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of the consolidated ﬁnancial statements in accordance with U.S. GAAP. (2) provide reasonable assurance that Our internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect our transactions and dispositions of our assets; transactions are recorded as necessary to permit preparation of the consolidated ﬁnancial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated ﬁnancial statements. Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. the effectiveness of our In connection with the preparation of our annual consolidated ﬁnancial statements, management has undertaken an assessment of reporting as of December 31, 2012 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of our internal control over ﬁnancial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, management has concluded that our internal control over ﬁnancial reporting is effective as of December 31, 2012 based on those criteria. internal control over ﬁnancial The Company’s independent auditors have issued an audit report on our assessment of the Company’s internal control over ﬁnancial reporting. This report appears below. Changes in Internal Control Over Financial Reporting No changes were made in our internal controls over ﬁnancial reporting, as such term is deﬁned in Exchange Act Rules 13a-15(f) and 15(d) − 15(f), during the fourth quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over ﬁnancial reporting. 128 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Maiden Holdings, Ltd. We have audited Maiden Holdings, Ltd. and subsidiaries’ internal control over ﬁnancial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Maiden Holdings, Ltd.’s management is responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over ﬁnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁnancial statements. Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Maiden Holdings, Ltd. and subsidiaries maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Maiden Holdings, Ltd. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash ﬂows for years ended December 31, 2012, 2011 and 2010, and our report dated March 8, 2013 expressed an unqualiﬁed opinion thereon. /s/ BDO USA, LLP New York, New York March 8, 2013 129 Item 9B. Other Information. None. 130 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is incorporated by reference from the information responsive thereto in the sections in the proxy statement for our Annual Meeting of Shareholders to be held on May 7, 2013 (the ‘‘Proxy Statement’’) captioned ‘‘Election of Directors’’, ‘‘Executive Officers’’, ‘‘Audit Committee’’, ‘‘Section 16(a) Beneﬁcial Ownership Reporting Compliance’’ and ‘‘Nominating and Corporate Governance Committee’’. We have adopted a Code of Business Conduct and Ethics for all employees. The Code of Business Conduct and Ethics is available free of charge on our website at www.maiden.bm and is available in print to any shareholder who requests it. We intend to disclose any amendments to this code by posting such information on our website, and disclose any waivers of this code applicable to our principal executive officer, principal ﬁnancial officer, principal accounting officer or controller and other executive officers who perform similar functions through such means or by ﬁling a Form 8-K. Item 11. Executive Compensation. The information required by this item is incorporated by reference from the information responsive thereto in the sections in the Proxy Statement captioned ‘‘Compensation Discussion and Analysis’’, ‘‘Director Compensation for 2012’’, ‘‘Compensation Committee Interlocks and Insider Participation’’ and ‘‘Compensation Committee Report’’. Item 12. Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference from the information responsive thereto in the sections in the Proxy Statement captioned ‘‘Security Ownership of Certain Beneﬁcial Owners’’, ‘‘Equity Compensation Plan Information’’ and ‘‘Security Ownership of Management’’. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference from the information responsive thereto in the sections in the Proxy Statement captioned ‘‘Certain Relationships and Related Transactions’’, ‘‘Audit Committee’’, ‘‘Board Independence’’, ‘‘Compensation Committee’’ and ‘‘Nominating and Corporate Governance Committee’’. Item 14. Principal Accounting Fees and Services. The information required by this item is incorporated by reference from the information responsive thereto in the section in the Proxy Statement captioned ‘‘Appointment of Independent Auditors of Maiden Holdings, Ltd.’’ Item 15. Exhibits, Financial Statement Schedules. (a) Financial statement schedules PART IV Financial statement schedules listed in the accompanying index to our Consolidated Financial Statements starting on page F- 1 are ﬁled as part of this Form 10-K, and are included in Item 8. All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Exhibits The exhibits listed in the Exhibit Index starting on page E-1 following the signature page are ﬁled herewith, which Exhibit Index is incorporated herein by reference. 131 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda on March 8, 2013. MAIDEN HOLDINGS, LTD. By: /s/ Arturo M. Raschbaum Name: Arturo M. Raschbaum Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature /s/ Arturo M. Raschbaum Arturo M. Raschbaum /s/ John M. Marshaleck John M. Marshaleck /s/ Barry D. Zyskind Barry D. Zyskind /s/ Raymond M. Neff Raymond M. Neff /s/ Simcha G. Lyons Simcha G. Lyons /s/ Yehuda L. Neuberger Yehuda L. Neuberger /s/ Steven H. Nigro Steven H. Nigro Title President and Chief Executive Officer (Principal Executive Officer) Date March 8, 2013 Chief Financial Officer (Principal Financial and Accounting Officer) March 8, 2013 March 8, 2013 March 8, 2013 March 8, 2013 March 8, 2013 March 8, 2013 Chairman Director Director Director Director 132 Exhibit No. 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7* 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 10.1* 10.2* 10.3* EXHIBIT INDEX Description Reference Memorandum of Association (as amended) Bye-Laws Form of Common Share Certiﬁcate Registration Rights Agreement by and between Maiden Holdings, Ltd. and Friedman, Billings, Ramsey & Co., Inc., dated as of July 3, 2007 Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Institutional Trustee and as Delaware Trustee, Maiden Holdings North America, Ltd., as Sponsor, and the Administrators (as named therein), dated as of January 20, 2009 Indenture by and between Maiden Holdings North America, Ltd. and Wilmington Trust Company, as Trustee, relating to Fixed Rate Subordinated Deferrable Interest Debentures Due 2039 (including the form of debenture), dated January 20, 2009 Guarantee Agreement by and between Maiden Holdings, Ltd., as Guarantor, and Wilmington Trust Company, as Trustee, dated as of January 20, 2009 Guarantee Agreement by and between Maiden Holdings North America, Ltd., as Guarantor, and Wilmington Trust Company, as Trustee, dated as of January 20, 2009 Form of Purchase Agreement by and among Maiden Holdings, Ltd., Maiden Capital Financing Trust, Maiden Holdings North America, Ltd. and various institutional investors, dated as of January 14, 2009 First Amendment to Amended and Restated Declaration of Trust, dated as of July 14, 2011, by and among Maiden Holdings North America, Ltd., Arturo M. Raschbaum, John M. Marshaleck and Karen L. Schmitt, as all of the Administrators, and Wilmington Trust Company, as Institutional Trustee and Delaware Trustee Form of Indenture for Debt Securities by and among Maiden Holdings North America, Ltd., Maiden Holdings, Ltd., as guarantor, and Wilmington Trust Company, as trustee First Supplemental Indenture, dated as of June 24, 2011, by and among Maiden Holdings North America, Ltd., Maiden Holdings, Ltd., as guarantor, and Wilmington Trust Company, as trustee Form of 8.25% Notes due 2041 (included in Exhibit 4.10) Second Supplemental Indenture, dated March 27, 2012, by and among Maiden Holdings North America, Ltd., Maiden Holdings, Ltd., as guarantor, and Wilmington Trust Company, as trustee Form of 8.000% Notes due 2042 (included in Exhibit 4.12) Certiﬁcate of Designations of 8.25% Non-Cumulative Preference Shares, Series A, adopted on August 7, 2012 Form of stock certiﬁcate evidencing 8.25% Series A Preference Share (included in Exhibit 4.14) Amended and Restated Maiden Holdings, Ltd. 2007 Share Incentive Plan as of July 26, 2011 Form of Share Option Agreement for Employee Recipients of Options under 2007 Share Incentive Plan Form of Share Option Agreement for Non-Employee Recipients of Options under 2007 Share Incentive Plan (1) (2) (2) (2) (3) (3) (3) (3) (3) (4) (5) (6) (6) (7) (7) (8) (8) (4) (2) (2) E-1 Exhibit No. 10.4* 10.5* 10.6* 10.7* 10.8* 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 Description Reference Form of Performance-Based Restricted Share Unit Agreement for Employee Recipients of Restricted Share Units under the Amended and Restated 2007 Share Incentive Plan Form of Employment Agreement by and between Maiden and Arturo Raschbaum, John Marshaleck, Patrick J. Haveron, Karen Schmitt and Lawrence F. Metz, dated as of November 1, 2011 Employment Agreement by and between Maiden Holdings, Ltd. and Ronald M. Judd, dated as of December 1, 2010 Master Agreement by and between Maiden Holdings, Ltd. and AmTrust Financial Services, Inc., dated as of July 3, 2007 Amendment No. 1 to the Master Agreement by and between Maiden Holdings, Ltd. and AmTrust Financial Services, Inc., dated as of September 17, 2007 Amended and Restated Quota Share Reinsurance Agreement by and between Maiden Insurance Company Ltd. and AmTrust International Insurance, Ltd. and dated as of June 1, 2008 Loan Agreement by and between AmTrust International Insurance, Ltd. and Maiden Insurance Company Ltd., dated as of November 16, 2007 Amendment No. 1 to the Loan Agreement by and between AmTrust International Insurance, Ltd. and Maiden Insurance Company Ltd., dated as of February 15, 2008 Asset Management Agreement by and between AII Insurance Management Limited and Maiden Insurance Company Ltd., dated as of July 3, 2007 First Amendment to Asset Management Agreement by and between AII Insurance Management Limited, Maiden Insurance Company Ltd., Maiden Holdings, Ltd., and Maiden Holdings North America, Ltd., dated as of November 3, 2008 Second Amendment to Asset Management Agreement by and between AII Insurance Management Limited, Maiden Insurance Company Ltd., Maiden Holdings, Ltd., Maiden Holdings North America, Ltd. and Maiden Reinsurance Company, dated as of December 23, 2008 Third Amendment to Asset Management Agreement by and between AII Insurance Management Limited, Maiden Insurance Company Ltd., Maiden Holdings, Ltd., Maiden Holdings North America, Ltd., Maiden Reinsurance Company and Maiden Specialty Insurance Company dated as of September 1, 2009 Fourth Amendment to Asset Management Agreement by and between AII Insurance Management Limited, Maiden Insurance Company Ltd., Maiden Holdings, Ltd., Maiden Holdings North America, Ltd., Maiden Reinsurance Company and Maiden Specialty Insurance Company dated as of August 6, 2010 Reinsurance Brokerage Agreement by and between Maiden Insurance Company Ltd. and AII Reinsurance Broker Ltd., dated as of July 3, 2007 Brokerage Services Agreement between Maiden Insurance Company Ltd. and IGI Intermediaries Limited, dated as of January 1, 2008 Reinsurance Brokerage Services Agreement between Maiden Insurance Company Ltd. and IGI Intermediaries, Inc., dated as of April 3, 2008 Endorsement No. 1 to the Amended and Restated Quota Share Reinsurance Agreement by and between Maiden Insurance Company Ltd. and AmTrust International Insurance, Ltd. dated as of July 26, 2011 (4) (9) (10) (2) (2) (11) (12) (12) (2) (10) (10) (10) (10) (2) (12) (13) (4) E-2 Description Reference Exhibit No. 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 Endorsement No. 2 to the Quota Share Reinsurance Contract by and between Maiden Insurance Company Ltd. and AmTrust International Insurance, Ltd. dated as of March 7, 2013 Quota Share Reinsurance Contract by and between Maiden Insurance Company Ltd. and AmTrust Europe Limited and/or AmTrust International Underwriters Limited dated as of April 1, 2011 Endorsement No. 1 to the Quota Share Reinsurance Contract by and between Maiden Insurance Company Ltd. and AmTrust Europe Limited and/or AmTrust International Underwriters Limited dated as of July 26, 2011 Endorsement No. 2 to the Quota Share Reinsurance Contract by and between Maiden Insurance Company Ltd. and AmTrust Europe Limited and/or AmTrust International Underwriters Limited dated as of August 7, 2012 Portfolio Transfer and Quota Share Reinsurance Agreement by and between Maiden Insurance Company Ltd. and Motors Insurance Corporation, dated as of October 31, 2008 Personal and Commercial Automobile Quota Share Reinsurance Agreement by and between Maiden Insurance Company Ltd. and Integon National Insurance Company, dated as March 1, 2010 Addendum No. 1 to Personal and Commercial Automobile Quota Share Reinsurance Agreement by and between Maiden Insurance Company Ltd. and Integon National Insurance Company and others, dated as October 1, 2012 Form of Indemniﬁcation Agreement between Maiden Holdings, Ltd. and its officers and directors Warrant Exchange Agreement by and between Michael Karfunkel and Maiden Holdings, Ltd. as of September 20, 2010 Warrant Exchange Agreement by and between George Karfunkel and Maiden Holdings, Ltd. as of September 20, 2010 10.31* Warrant Exchange Agreement by and between Barry Zyskind and Maiden Holdings, Ltd. as of September 20, 2010 10.32 10.33 10.34 21.1 23.1 31.1 31.2 32.1 32.2 Lockup Agreement by and between Michael Karfunkel and Maiden Holdings, Ltd. as of September 20, 2010 Lockup Agreement by and between George Karfunkel and Maiden Holdings, Ltd. as of September 20, 2010 Lockup Agreement by and between Barry Zyskind and Maiden Holdings, Ltd. as of September 20, 2010 Subsidiaries of the registrant Consent of BDO USA, LLP Section 302 Certiﬁcation of CEO Section 302 Certiﬁcation of CFO Section 906 Certiﬁcation of CEO Section 906 Certiﬁcation of CFO † (4) (4) (14) (15) (10) † (12) (16) (16) (16) (16) (16) (16) † † † † † † (1) (2) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Registration Statement on Form S-8 ﬁled with the SEC on May 18, 2010 (File No. 333-166934). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Registration Statement on S-1 initially ﬁled with the SEC on September 17, 2007, subsequently amended and declared effective May 6, 2008 (File No. 333-146137). E-3 (3) (4) (5) (6) (7) (8) (9) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Current Report on Form 8-K ﬁled with the SEC on January 26, 2009 (File No. 001-34042). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2010 ﬁled with the SEC on August 8, 2011 (File No. 001-34042). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Registration Statement on S-3 ﬁled with the SEC on February 7, 2011 (File Nos. 333-172107 and 333-172107-01). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Current Report on Form 8-K ﬁled with the SEC on June 17, 2011 (File No. 001-34042). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Current Report on Form 8-K ﬁled with the SEC on March 27, 2012 (File No. 001-34042). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Current Report on Form 8-K ﬁled with the SEC on August 22, 2012 (File No. 001-34042). Incorporated by reference to the ﬁling of such exhibit with the registrant’s Annual Report on Form 10-K for the ﬁscal year ended December 31, 2011 ﬁled with the SEC on March 13, 2012 (File No. 001-34042). (10) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Annual Report on Form 10-K for the ﬁscal year ended December 31, 2010 ﬁled with the SEC on March 14, 2011 (File No. 001-34042). (11) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Annual Report on Form 10-K for the ﬁscal year ended December 31, 2008 ﬁled with the SEC on March 31, 2009 (File No. 001-34042). (12) Incorporated by reference to the ﬁling of such exhibit with Amendment No. 2 to the registrant’s Registration Statement on S-1 ﬁled with the SEC on March 28, 2008 (No. 333-146137). (13) Incorporated by reference to the ﬁling of such exhibit with Amendment No. 3 to the registrant’s Registration Statement on S-1 ﬁled with the SEC on April 24, 2008 (No. 333-146137). (14) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 ﬁled with the SEC on August 9, 2012 (File No. 001-34042) (15) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Current Report on Form 8-K ﬁled with the SEC on November 7, 2008 (File No. 001-34042). (16) Incorporated by reference to the ﬁling of such exhibit with the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2010 ﬁled with the SEC on November 9, 2010 (File No. 001-34042). Filed herewith. † * Management contract or compensatory plan or arrangement E-4 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Related Notes Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 2010 . . . . . Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 Page F-2 F-3 F-4 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 1 — Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 2 — Signiﬁcant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 3 — Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 4 — Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 5 — Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 6 — Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 7 — Goodwill and Intangible Assets Note 8 — Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 9 — Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 10 — Reserve for Loss and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Note 11 — Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 12 — Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 13 — Earnings Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 14 — Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 15 — Share Compensation and Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 16 — Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 17 — Statutory Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 18 — Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 19 — Condensed Quarterly Financial Data — Unaudited . . . . . . . . . . . . . . . . . . . . . . . . . Supplementary Information Summary of Investments — Other than Investments in Related Parties (Schedule I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Condensed Financial Information of Registrant (Schedule II) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplementary Insurance Information (Schedule III) Supplementary Reinsurance Information (Schedule IV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplementary Insurance Information Concerning Property and Casualty Insurance Operations (Schedule VI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 F-7 F-9 F-9 F-9 F-17 F-23 F-25 F-29 F-33 F-35 F-36 F-37 F-39 F-44 F-47 F-47 F-49 F-51 F-53 F-55 F-56 S-1 S-2 S-5 S-6 S-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Maiden Holdings, Ltd. We have audited the accompanying consolidated balance sheets of Maiden Holdings, Ltd. and subsidiaries (the ‘‘Company’’) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash ﬂows for each of the years ended December 31, 2012, 2011 and 2010. In connection with our audits of the ﬁnancial statements, we have also audited the ﬁnancial statement schedules listed in the accompanying index. These ﬁnancial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the ﬁnancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable includes assurance about whether the ﬁnancial statements are free of material misstatement. An audit examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of Maiden Holdings, Ltd. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash ﬂows for the years ended December 31, 2012, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the ﬁnancial statement schedules, when considered in relation to the basic consolidated ﬁnancial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Maiden Holdings, Ltd.’s internal control over ﬁnancial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO) and our report dated March 8, 2013 expressed an unqualiﬁed opinion. /s/ BDO USA, LLP New York, New York March 8, 2013 F-2 MAIDEN HOLDINGS, LTD. CONSOLIDATED BALANCE SHEETS As of December 31, 2012 and 2011 (In thousands of U.S. dollars, except share and per share data) ASSETS Investments: Fixed maturities, available-for-sale, at fair value (Amortized cost 2012: $2,475,202; 2011: $1,957,106) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments, at fair value (Cost 2012: $2,599; 2011: $1,955). . . . . . . . . Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance balances receivable, net (includes $265,766 and $178,745 from related parties in 2012 and 2011, respectively). . . . . . . . . . . . . . . . . . . . . . . Funds withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid reinsurance premiums (includes $743 and $7,265 from related parties in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance recoverable on unpaid losses (includes $9,387 and $7,207 from related parties in 2012 and 2011, respectively). . . . . . . . . . . . . . . . . . . . . . . Loan to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred commission and other acquisition expenses (includes $187,387 and $147,743 from related parties in 2012 and 2011, respectively) . . . . . . . . . . . . Goodwill and intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES Reserve for loss and loss adjustment expenses (includes $610,810 and $396,198 2012 2011 $2,618,697 2,901 2,621,598 81,543 132,327 21,007 $2,020,661 2,192 2,022,853 188,082 114,895 13,215 522,614 42,712 423,355 42,605 38,725 35,381 110,858 167,975 20,289 167,975 270,669 94,393 33,742 $4,138,163 248,436 98,755 19,270 $3,395,111 from related parties in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . $1,740,281 $1,398,438 Unearned premiums (includes $612,903 and $483,935 from related parties in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936,497 111,957 207,500 126,317 3,122,552 832,047 161,883 107,500 126,263 2,626,131 Commitments and Contingencies EQUITY Preference shares − Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares ($0.01 par value; 73,306,283 and 73,183,764 shares issued in 2012 and 2011, respectively; 72,343,947 and 72,221,428 shares outstanding in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares, at cost (2012 and 2011: 962,336 shares) . . . . . . . . . . . . . . . . . Total Maiden shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interest in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 — 733 575,869 141,130 151,308 (3,801) 1,015,239 372 1,015,611 $4,138,163 732 579,004 64,059 128,648 (3,801) 768,642 338 768,980 $3,395,111 See accompanying notes to Consolidated Financial Statements F-3 MAIDEN HOLDINGS, LTD. CONSOLIDATED STATEMENTS OF INCOME (In thousands of U.S. dollars, except share and per share data) For the Year Ended December 31, Revenues: Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in unearned premiums . . . . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . Other insurance revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains on investments. . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses: Net loss and loss adjustment expenses . . . . . . . . . . . . . . . . . Commission and other acquisition expenses . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . Interest and amortization expenses. . . . . . . . . . . . . . . . . . . . Accelerated amortization of junior subordinated debt discount and issuance cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated debt repurchase expense. . . . . . . . . . . . . Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . Foreign exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . Income taxes: Current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: (income) loss attributable to noncontrolling interest . . . . Net income attributable to Maiden shareholders . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Maiden common shareholders. . Basic earnings per share attributable to Maiden common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share attributable to Maiden common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per common share . . . . . . . . . . . . . . . . . Weighted average number of basic common shares 2012 2011 2010 $ 2,000,992 $ 1,812,597 $ 1,298,055 $ 1,901,285 (97,505) 1,803,780 12,890 81,188 1,907 1,899,765 $ 1,723,521 (171,093) 1,552,428 12,640 74,891 481 1,640,440 $ 1,227,831 (58,041) 1,169,790 — 71,651 6,604 1,248,045 1,262,348 492,031 53,804 36,384 — — 4,362 (1,638) 1,847,291 52,474 1,043,054 438,812 53,892 34,155 20,313 15,050 5,033 (323) 1,609,986 30,454 755,122 336,697 42,180 36,466 — — 5,808 580 1,176,853 71,192 1,020 1,193 2,213 50,261 (107) 50,154 (3,644) 46,510 0.64 0.64 0.33 $ $ $ $ 632 1,295 1,927 28,527 (3) 28,524 — 28,524 0.40 0.39 0.30 $ $ $ $ 160 1,170 1,330 69,862 4 69,866 — 69,866 0.99 0.98 0.27 $ $ $ $ outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,263,022 72,155,503 70,799,966 Weighted average number of diluted common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,105,531 72,903,688 71,372,688 See accompanying notes to Consolidated Financial Statements F-4 MAIDEN HOLDINGS, LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands of U.S. dollars, except share and per share data) For the Year Ended December 31, Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income Unrealized holdings net gains arising during the period . . . . . . . . . . . Adjustment for reclassiﬁcation of net realized gains recognized in net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (income) loss attributable to noncontrolling interest . . . . . . . . . . . Other comprehensive (income) loss attributable to noncontrolling 2012 2011 2010 $ 50,261 $28,527 $69,862 82,915 12,189 30,154 (2,987) (2,852) 77,076 127,337 (107) (3,206) 733 9,716 38,243 (3) (8,147) (420) 21,587 91,449 4 interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 9 — Comprehensive (income) loss attributable to noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income attributable to Maiden shareholders. . . . . . (112) $127,225 6 $38,249 4 $91,453 See accompanying notes to Consolidated Financial Statements F-5 MAIDEN HOLDINGS, LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands of U. S. dollars) For the Year Ended December 31, Preference shares − Series A Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of preference shares . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of options and issuance of shares . . . . . . . . . . . . . . . . . Exchange of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of options and issuance of common shares . . . . . . . . . . . Exchange of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance costs of preference shares . . . . . . . . . . . . . . . . . . . . . . Partial disposal of interest in subsidiary . . . . . . . . . . . . . . . . . . . Share based compensation expense . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in net unrealized gains on investments . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Maiden shareholders. . . . . . . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common shares . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interest in subsidiaries Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partial disposal of interest in subsidiary . . . . . . . . . . . . . . . . . . . Dividend paid to noncontrolling interest . . . . . . . . . . . . . . . . . . . Net income (loss) attributable to noncontrolling interest . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 2010 $ — $ 150,000 150,000 — — — 731 1 — 732 $ — — — 713 — 18 731 577,135 421 — — 141 1,307 579,004 54,334 8,983 742 64,059 121,775 28,524 — (21,651) 128,648 576,086 52 (18) — — 1,015 577,135 32,747 22,007 (420) 54,334 70,781 69,866 — (18,872) 121,775 732 1 — 733 579,004 477 — (4,959) — 1,347 575,869 64,059 79,928 (2,857) 141,130 128,648 50,154 (3,644) (23,850) 151,308 (3,801) (3,801) (3,801) (3,801) (3,801) (3,801) 338 — — (78) 107 5 372 $1,015,611 275 — 69 — 3 (9) 338 $768,980 — 279 — — (4) — 275 $750,449 See accompanying notes to Consolidated Financial Statements F-6 MAIDEN HOLDINGS, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) For the Year Ended December 31, Cash ﬂows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 2010 $ 50,261 $ 28,527 $ 69,862 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangibles . . . . . . . . . . . Net realized and unrealized gains on investments . . . . . . . . Foreign exchange (gains) losses. . . . . . . . . . . . . . . . . . . . Amortization of share-based compensation expense, bond premium and discount and subordinated debt discount, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets − (increase) decrease: Reinsurance balances receivable, net. . . . . . . . . . . . . . . Funds withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . Reinsurance recoverable on unpaid losses . . . . . . . . . . . Accrued investment income. . . . . . . . . . . . . . . . . . . . . Deferred commission and other acquisition expenses . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in liabilities − increase (decrease): Reserve for loss and loss adjustment expenses . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . Cash ﬂows from investing activities: Purchases of investments: Purchases of ﬁxed-maturity 6,258 (1,907) (1,638) 8,599 (481) (323) 7,205 (6,604) 580 10,949 22,236 (3,586) (98,987) 917 (3,344) (90,567) (7,719) (22,073) (13,277) 337,348 103,796 49,072 319,089 (168,338) 16,074 (6,389) (13,632) 836 (45,037) (14,422) 176,869 178,436 (1,685) 181,270 (29,036) (152,713) (240) 1,684 (2,686) (30,648) 1,583 220,932 68,413 6,833 151,579 securities − available-for-sale . . . . . . . . . . . . . . . . . . Purchases of ﬁxed-maturity securities − trading and short sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of other investments . . . . . . . . . . . . . . . . . . (1,193,768) (636,141) (1,010,142) (102,073) (940) (663,339) (1,173) (1,293,386) (424) Sale of investments: Proceeds from sales of ﬁxed-maturity securities − available-for-sale . . . . . . . . . . . . . . . . . . 142,694 304,499 331,593 Proceeds from sales of ﬁxed-maturity securities − trading and short sales . . . . . . . . . . . . . . 49,883 720,100 1,291,843 Proceeds from maturities and calls of ﬁxed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from redemption of other investments . . . . . . . 484,091 340 310,526 4,896 (Increase) decrease in restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of subsidiaries (net of cash acquired). . . . . . . . Purchase of capital assets . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by investing activities. . . . . . . . . (17,432) — (341) (637,546) (25,139) 635 (1,538) 13,326 507,326 108 55,657 (4,893) (2,875) (125,193) See accompanying notes to Consolidated Financial Statements F-7 For the Year Ended December 31, Cash ﬂows from ﬁnancing activities: 2012 2011 2010 Repurchase agreements, net . . . . . . . . . . . . . . . . . . . . . . Senior notes issuance, net of issuance costs. . . . . . . . . . . . Repayment of junior subordinated debt. . . . . . . . . . . . . . . Preference shares − Series A issuance, net of issuance costs . Contribution of noncontrolling interest . . . . . . . . . . . . . . . Common share issuance . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid to Maiden common shareholders . . . . . . . . Dividends paid on preference shares . . . . . . . . . . . . . . . . Net cash provided by (used in) ﬁnancing activities . . . . . . . . Effect of exchange rate changes on foreign currency cash . Net (decrease) increase in cash and cash equivalents . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . . . — 96,594 — 145,041 — 478 (29,630) (3,644) 208,839 3,079 (106,539) 188,082 $ 81,543 (76,225) 104,689 (107,500) — — 422 (20,921) — (99,535) (3,130) 91,931 96,151 $ 188,082 (19,176) — — — 279 52 (18,394) — (37,239) (392) (11,245) 107,396 $ 96,151 Supplemental information on cash ﬂows: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental information about non cash investing and ﬁnancing activities: Acquisition of ﬁxed maturities, available-for-sale . . . . . . . . . . . Funds withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance balances receivable. . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares issued in exchange of warrants . . . . . . . . . . . . Redemption of other investment. . . . . . . . . . . . . . . . . . . . . . . Purchase of other investment . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,219 55 $ 36,850 429 $ 36,400 129 — — — — — — — 81,930 (81,930) — — — — — 17,806 — (17,806) 18 (18) (4,751) 4,751 See accompanying notes to Consolidated Financial Statements F-8 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 1. Organization ‘‘Parent Company’’) Maiden Holdings, Ltd. is a (sometimes referred to as ‘‘Maiden Holdings’’ or Bermuda-based holding company formed in June 2007, primarily focused on serving the needs of regional and specialty insurers in the United States and Europe by providing innovative reinsurance solutions designed to support their capital needs. Together with its subsidiaries (collectively referred to as the ‘‘Company’’, ‘‘We’’ or ‘‘Maiden’’), Maiden specializes in reinsurance solutions that optimize ﬁnancing by providing coverage within the more predictable and actuarially credible lower layers of coverage and/or reinsure 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. Our principal operating subsidiaries in Bermuda and the United States are rated ‘‘A-’’ (Excellent) with a stable outlook by A.M. Best Company (‘‘A.M. Best’’), which rating is the fourth highest of sixteen rating levels, and BBB+ (Good) with a stable outlook by Standard & Poor’s (‘‘S&P’’), which is the eighth highest of twenty-two rating levels. We provide reinsurance through our wholly-owned subsidiaries, Maiden Insurance Company Ltd. (‘‘Maiden Bermuda’’) and Maiden Reinsurance Company (‘‘Maiden US’’) and have operations in Bermuda and the United States, respectively. 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 property and inland marine. Maiden Bermuda does not underwrite any primary insurance business. Internationally, we provide reinsurance-related services through Maiden Global 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. 2. Signiﬁcant Accounting Policies Basis of Reporting and Consolidation — These Consolidated Financial Statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The Consolidated Financial Statements include the accounts of Maiden Holdings and all of its subsidiaries. These Consolidated Financial Statements reﬂect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the period and all such adjustments are of a normal recurring nature. All signiﬁcant intercompany transactions and accounts have been eliminated in the Consolidated Financial Statements. Certain prior year comparatives have been reclassiﬁed to conform to the current year presentation. to make estimates and assumptions that affect Estimates — The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP the reported amounts of assets and requires management liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The signiﬁcant estimates reﬂected in the Company’s ﬁnancial statements include, but are not limited to: • • • • • reserve for loss and loss adjustment expenses; recoverability of deferred commission and other acquisition expenses; determination of impairment of goodwill and other intangible assets; valuation of ﬁnancial instruments; and determination of other-than-temporary impairment of investments. F-9 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) Investments — The Company as classiﬁes ‘‘available-for-sale’’ and, accordingly, they are carried at estimated fair value. The fair value of ﬁxed maturity securities is generally determined from quotations received from nationally recognized pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments comprise securities due to mature within one year of the date of purchase. its ﬁxed maturity investments currently all of The Company accounts for its other investments at fair value in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codiﬁcation (‘‘ASC’’) Topic 944, ‘‘Financial Services’’ (‘‘ASC 944’’). Other investments comprise investments in limited partnerships which are reported at fair value information received from the fund managers and other information available to based on the ﬁnancial management. Unrealized gains or losses on other investments are reported as a component of accumulated other comprehensive income. Purchases and sales of investments are recorded on a trade date basis. Realized gains or losses on sales of investments are determined based on the ﬁrst in ﬁrst out cost method. Net investment income is recognized when earned and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method and is net of investment management fees and other expenses. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities are recognized on a prospective basis through yield adjustments. 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 an 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 that we will be required to sell a ﬁxed maturity security before recovery of its amortized cost 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 F-10 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) 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 noncredit (i.e. recoverable) impairment. Fair Value Measurements — FASB ASC Topic 820, ‘‘Fair Value Measurements and Disclosures’’ (‘‘ASC 820’’) deﬁnes fair value as the price to sell an asset or transfer a liability (i.e. the ‘‘exit price’’) in an orderly transaction between market participants. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: • • • Level 1 — Valuations based on unadjusted quoted market prices for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a signiﬁcant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities, U.S. Treasury securities, and listed derivatives that are actively traded. Level 2 — Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, or valuations based on models where the signiﬁcant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Examples of assets and liabilities utilizing Level 2 inputs include: listed derivatives that are not actively traded; U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities (‘‘MBS’’) and asset-backed securities (‘‘ABS’’); short-duration high yield fund, and over-the-counter (‘‘OTC’’) derivatives (e.g. foreign currency options and forward contracts). Level 3 — Valuations based on models where signiﬁcant inputs are not observable. The unobservable inputs reﬂect our own assumptions about assumptions that market participants would use. Examples of assets and liabilities utilizing Level 3 inputs include: insurance and reinsurance derivative contracts; hedge and credit funds with partial transparency; and collateralized loan obligation (‘‘CLO’’) — equity tranche securities that are traded in less liquid markets. The availability of observable inputs can vary from ﬁnancial instrument to ﬁnancial instrument and is affected by a wide variety of factors, including, for example, the type of ﬁnancial instrument, whether the ﬁnancial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires signiﬁcantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. We use prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassiﬁed between levels. For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in the Level 1 hierarchy. The Company receives the quoted market prices from third party, nationally, recognized pricing services (‘‘pricing service’’). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate. The fair value estimates are included in the Level 2 hierarchy. The Company will challenge any prices for its investments which are considered to not represent fair value. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the F-11 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) estimate is Level 2 or Level 3 hierarchy. The Company bases its estimates of fair values for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s length transaction. Cash and Cash Equivalents — The Company maintains its cash accounts in several banks and brokerage institutions. Cash equivalents consist of investments in money market funds and short-term investments with an original maturity of 90 days or less and are stated at cost, which approximates fair value. Restricted cash and cash equivalents are separately reported in the Consolidated Balance Sheets. Accordingly, changes in restricted cash and cash equivalents are reported as an investing activity in our Consolidated Statements of Cash Flows. The Company maintains certain cash and investments in Trust accounts to be used primarily as collateral for unearned premiums and loss and loss adjustment expenses reserves owed to insureds. The Company is required to maintain minimum balances in these accounts based on pre-determined formulas. See Note 5(e) for additional details. Premiums and Related Costs — For pro-rata contracts and excess-of-loss contracts where no deposit or minimum premium is speciﬁed in the contract, written premium is recognized based on estimates of ultimate premiums provided by the ceding companies. Initial estimates of written premium are recognized in the period in which the underlying risks are incepted. Subsequent adjustments, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period in which they are determined. Reinsurance premiums assumed are generally earned on a pro-rata basis over the terms of the underlying policies or reinsurance contracts. Contracts and policies written on a ‘‘losses occurring’’ basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a ‘‘risks attaching’’ basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original typically resulting in recognition of premiums earned over a 24-month period. Reinsurance premiums on specialty risk and extended warranty are earned based on the estimated program coverage period. These estimates are based on the expected distribution of coverage periods by contract at inception, because a single contract may contain multiple coverage period options and these estimates are revised based on the actual coverage period selected by the original insured. Unearned premiums represent the portion of premiums written which is applicable to the unexpired term of the contract or policy in force. These premiums can be subject to estimates based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period in which they are determined. term of the reinsurance contract, The unearned portion of reinsurance purchased by the Company (retrocession or reinsurance premiums ceded) is reported as prepaid reinsurance premiums and amortized over the contract period in proportion to the amount of insurance protection provided. The ultimate amount of premiums, including adjustments, is recognized as premiums ceded, and amortized over the applicable contract period to which they apply. Reserves are established for the earned portion of premiums ceded and recorded as an asset called reinsurance recoverable on unpaid losses. Premiums earned are reported net of reinsurance in the Consolidated Statements of Income. Assumed and ceded reinsurance contracts that lack a signiﬁcant transfer of risk are treated as deposits. Acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of insurance and reinsurance business. Policy and contract acquisition expenses, including assumed commissions and other direct operating expenses that are related to successful contracts are deferred and recognized as expense as related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs and believes they are fully recoverable. A premium deﬁciency is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition expenses and anticipated investment income exceed unearned premium. F-12 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) Loss and Loss Adjustment Expenses Incurred — Loss and loss adjustment expenses (‘‘LAE’’) represent the estimated ultimate net costs of all reported and unreported losses incurred through December 31. The reserve for loss and LAE is estimated using individual case-basis valuations and statistical analysis and is not discounted. Although considerable variability is inherent in the estimates of reserves for loss and LAE, management believes that the reserve for loss and LAE is adequate. In estimating reserves, the Company utilizes a variety of standard actuarial methods. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations. Capital Assets — Capital assets are recorded at cost. Maintenance and repairs are charged to operations as incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows: Furniture and ﬁxtures Computer equipment and software Vehicles Leasehold improvements 3 − 7 years 3 years 3 years Lease term Business Combinations, Goodwill and Intangible Assets — A purchase price that is in excess of the fair value of the net assets acquired arising from a business combination is recorded as goodwill, and is not amortized. Other intangible assets with a ﬁnite life are amortized over the estimated useful life of the asset. Other intangible assets with an indeﬁnite useful life are not amortized. Goodwill and other indeﬁnite life intangible assets are tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Deﬁnite life intangible assets are reviewed for indicators of impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable, and tested for impairment if appropriate. For purposes of the annual impairment evaluation, goodwill is assigned to the applicable reporting unit of the acquired entities giving rise to the goodwill. The Company has established October 1 as the date for performing its annual tests. If goodwill or other intangible assets are impaired, they are written down to their estimated fair values with a corresponding loss reﬂected in the Company’s Consolidated Statements of Income. impairment Non Controlling Interests — The Company accounts for its noncontrolling interest in accordance with FASB ASC Topic 810 ‘‘ Consolidations’’, and presents such noncontrolling shareholders’ interest in the equity section of the Company’s Consolidated Balance Sheets. Net income (loss) attributable to noncontrolling interests is presented separately in the Company’s Consolidated Statements of Income. Income Taxes — The Company accounts for income taxes using FASB ASC Topic 740 ‘‘ Income Taxes’’ for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reﬂect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and amounts used for income tax purposes. A valuation allowance is recorded if it is more likely than not that some or all of a deferred tax asset may not be realized. The Company considers future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance. In the event the Company determines that it will not be able to realize all or part of its deferred income tax assets in the future, an adjustment to the deferred income tax assets would be charged to income in the period in which such determination is made. In addition, if the Company subsequently assesses that the valuation allowance is no longer needed, a beneﬁt would be recorded to income in the period in which such determination is made. U.S. GAAP allows for the recognition of tax beneﬁts of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax beneﬁt claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax expense. F-13 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) Share Compensation Expense — The Company recognizes the compensation expense for share option grants, based on the fair value of the award on the date of grant, over the vesting period, which is the requisite service period. The fair value of the grant will be amortized ratably over its vesting period as a charge to compensation expense and an increase to additional paid in capital in Shareholders’ Equity. Earnings Per Share — Basic earnings per share are computed based on the weighted-average number of common shares outstanding. Dilutive earnings per share are computed using the weighted-average number of common shares outstanding during the period adjusted for the dilutive impact of share options using the treasury stock method. Treasury Shares — Treasury shares are common shares repurchased by the Company and not subsequently cancelled. These shares are recorded at cost and result in a reduction of our shareholders’ equity in the Consolidated Balance Sheets. Foreign Currency Transactions — The functional currency of the Company and many of its subsidiaries is the U.S. dollar. For these companies, we translate monetary assets and liabilities denominated in foreign currencies at year-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 at average exchange rates during the year. Monetary assets and liabilities include investments, cash and cash equivalents, reinsurance balances receivable, reserve for loss and loss adjustment expenses and accrued expenses and other liabilities. Accounts that are classiﬁed as non-monetary, such as deferred commission and other acquisition expenses and unearned premiums, are not revalued. Assets and liabilities of subsidiaries and divisions, whose functional currency is not the U.S. dollar, are translated at prevailing year-end exchange rates. Revenues and expenses of such foreign entities are translated at average exchange rates during the year. The effects of the translation adjustments for foreign entities are included in accumulated other comprehensive income. The amount of cumulative translation adjustment as of December 31, 2012 was $(2,535) (2011 − $322). Recently Adopted Accounting Standards Updates Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreement In April 2011, the FASB amended its guidance on accounting for repurchase agreements. The amendments simplify the accounting by eliminating the requirement that the transferor demonstrate it has adequate collateral to fund substantially all the cost of purchasing replacement assets. Under the amended guidance, a transferor maintains effective control over transferred ﬁnancial assets (and thus accounts for the transfer as a secured borrowing) if there is an agreement that both entitles and obligates the transferor to repurchase the ﬁnancial assets before maturity and if all of the following conditions previously required are met; (i) ﬁnancial assets to be repurchased or redeemed are the same or substantially the same as those transferred, (ii) repurchase or redemption date before maturity at a ﬁxed or determinable price, and (iii) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. As a result, more arrangements could be accounted for as secured borrowings rather than sales. The updated guidance is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011, but early adoption was prohibited. The adoption of this guidance did not have any effect on the Company’s results of operations, ﬁnancial position or liquidity. Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS In May 2011, the FASB issued updated guidance that addresses the objective of the FASB and the International Accounting Standards Board (‘‘IASB’’) to develop common requirements for measuring and for disclosing information about fair value measurements with U.S. GAAP and International Financial Reporting Standards (‘‘IFRS’’). The FASB and the IASB worked together to ensure that fair value has the same meaning F-14 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) improve comparability of in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The FASB and the IASB concluded that this guidance will fair value measurements presented and disclosed in ﬁnancial statements prepared in accordance with U.S. GAAP and IFRS. The guidance explains how to measure fair value. This updated guidance does not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of ﬁnancial reporting. The updated guidance is effective during interim and annual periods after December 15, 2011. Early application was not permitted. The adoption of this guidance did not have any effect on the Company’s results of operations, ﬁnancial position or liquidity. Presentation of Comprehensive Income In June 2011, the FASB issued updated guidance, Accounting Standards Update (‘‘ASU’’) 2011-05, to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity. The updated guidance requires that all non-owner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance is to be applied retrospectively and is effective January 1, 2012, except for the provision requiring entities to present components of reclassiﬁcations of other comprehensive income on the face of the income statement, which the FASB voted to defer indeﬁnitely during the fourth quarter of 2011. Early adoption was permitted. The adoption of this guidance resulted in a change in the presentation of the Company’s ﬁnancial statements but did not have any impact on the Company’s results of operations, ﬁnancial position or liquidity. Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In October 2010, the FASB issued ASU 2010-26, which modiﬁes the deﬁnition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance speciﬁes that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 is effective for ﬁscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company applied the new provisions of ASU 2010-26 prospectively. As a result of adopting ASU 2010-26, commission and other acquisition expenses have increased by $2,033 and net income attributable to Maiden shareholders decreased by the same amount for the year ended December 31, 2012. The impact of the change on basic and diluted earnings per common share is a decrease of $0.03 for the year ended December 31, 2012. The application of the new provisions means that $2,614 of unamortized deferred commission and other acquisition expenses as of January 1, 2012, that had been deferred under prior guidance, would not have been deferrable and would have been recognized as an expense over the original amortization period. If the Company had followed ASU 2010-26 in 2011, commission and other acquisition expenses would have increased by $2,614 for the year ended December 31, 2011. F-15 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) Intangibles — Goodwill and Other: Testing Goodwill for Impairment In September 2011, the FASB issued updated guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. Under the new guidance, an entity has the option to ﬁrst assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The FASB provided a sample list of events and circumstances that an entity can consider in performing its qualitative assessment. Under the amended guidance, an entity has the option to bypass the qualitative assessment and proceed directly to performing the ﬁrst step of the two-step goodwill impairment test and may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for ﬁscal years beginning after December 15, 2011. Early adoption was permitted. The annual impairment test is done during the fourth quarter and the adoption of this guidance did not have any effect on the Company’s results of operations, ﬁnancial position or liquidity. Technical Corrections and Improvements In October 2012, FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this ASU represent changes to clarify the Codiﬁcation, correct unintended application of guidance, or make minor improvements to the Codiﬁcation that are not expected to have a signiﬁcant effect on current accounting practice or create a signiﬁcant administrative cost to most entities. Additionally, the amendments will make the Codiﬁcation easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clariﬁcations. Transition guidance is provided for amendments the FASB believes could change practice. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for ﬁscal periods beginning after December 15, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, ﬁnancial position or liquidity. Recently Issued Accounting Standards Updates Not Yet Adopted Qualitative Impairment Test For Indeﬁnite-Lived Intangibles On July 27, 2012, the FASB issued ﬁnal guidance adding an optional qualitative assessment for determining whether an indeﬁnite-lived intangible asset is impaired. This ASU 2012-02 is similar to last year’s goodwill guidance which allows companies to perform a qualitative assessment to test goodwill for impairment. This guidance gives companies the option to ﬁrst perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that an indeﬁnite-lived intangible asset is impaired. If a company determines that it is more likely than not that the fair value of such asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. However, if a company concludes otherwise, it must calculate the fair value of the asset, compare that value with its carrying amount and record an impairment charge, if any. To perform a qualitative assessment, a company must identify and evaluate changes in economic, industry and company-speciﬁc events and circumstances that could affect the signiﬁcant inputs used to determine the fair value of an indeﬁnite-lived intangible asset. The guidance is effective for annual and interim impairment tests performed for ﬁscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have any effect on the Company’s results of operations, ﬁnancial position or liquidity. F-16 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 2. Signiﬁcant Accounting Policies − (continued) Balance Sheet Offsetting In December 2011, the FASB issued ASU 2011-11requiring additional disclosures about ﬁnancial instruments and derivative instruments that are either: (1) offset for balance sheet presentation purposes or (2) subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. In January 2013, the FASB issued ASU 2013-01 to address implementation issues about the scope of ASU 2011-11. This new guidance clariﬁes that the scope, of the offsetting disclosures required, applies to derivatives accounted for in accordance with ASC 815 Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities lending transactions. This guidance will be effective on January 1, 2013, with retrospective presentation of the new disclosures required. As this new guidance is disclosure-related only and does not amend the existing balance sheet offsetting guidance, the adoption of this guidance is not expected to have an impact on our results of operations, ﬁnancial condition or liquidity. Comprehensive Income — Reporting of amounts reclassiﬁed out of Accumulated Other Comprehensive Income In February 2013, the FASB issued ASU 2013-02, which adds new disclosure requirements for items reclassiﬁed out of accumulated other comprehensive income. The ASU expands the current disclosure guidance by requiring entities to present separately, for each component of other comprehensive income, current period reclassiﬁcations out of accumulated other comprehensive income and other amounts of current period other comprehensive income. In addition, the ASU requires entities to present, either on the face of the statement where net income is presented or in the notes to the ﬁnancial statements, signiﬁcant amounts reclassiﬁed out of other comprehensive income by component of accumulated other comprehensive income. The new disclosure requirements are effective for ﬁscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption of the guidance is permitted and shall be applied prospectively. The adoption of this guidance is not expected to have an impact on our results of operations, ﬁnancial condition or liquidity. 3. Segment Information The Company currently operates three business segments, Diversiﬁed Reinsurance, AmTrust Quota Share Reinsurance and the ACAC Quota Share. The Company evaluates segment performance based on segment proﬁt separately from the results of our investment portfolio. Other operating expenses allocated to the segments are called General and Administrative expenses which are allocated on an actual basis except salaries and beneﬁts where management’s judgment the Company does not allocate general corporate expenses to the segments. In determining total assets by segment the Company identiﬁes those assets that are attributable to a particular segment such as reinsurance balances receivable, funds withheld, prepaid reinsurance premiums, reinsurance recoverable on unpaid losses, deferred commission and other acquisition expenses, restricted cash and cash equivalents and investments. All remaining assets are allocated to Corporate. loans, goodwill and intangible assets, is applied; The fee-generating business (‘‘IIS Fee Business’’) associated with the acquisition of certain companies, businesses and assets comprising the international insurance services business of GMAC Insurance Holdings Ltd. (the ‘‘IIS Acquisition’’), 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 that fee revenue is separately reported on the line generated under the applicable reinsurance contracts, captioned ‘‘Other insurance revenue’’ in the Company’s Consolidated Statements of Income. F-17 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) The following tables summarize the underwriting results of our operating segments: For the Year Ended December 31, 2012 Net premiums written . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . Other insurance revenue. . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . Commission and other acquisition expenses . . . . General and administrative expenses . . . . . . . . . Underwriting (loss) income . . . . . . . . . . . . . Reconciliation to net income attributable to Maiden common shareholders Net investment income and realized and unrealized gains on investments. . . . . . . . . . . Amortization of intangible assets. . . . . . . . . . . . Foreign exchange gains . . . . . . . . . . . . . . . . . . Interest and amortization expenses. . . . . . . . . . . Other general and administrative expenses . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . Income attributable to noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . Net income attributable to Maiden common shareholders. . . . . . . . . . . . . . . . . Net loss and loss expense ratio* . . . . . . . . . . . . Commission and other acquisition expense ratio** . . . . . . . . . . . . . . . . . . . . . . General and administrative expense ratio*** . . . . Combined ratio**** . . . . . . . . . . . . . . . . . . Diversiﬁed Reinsurance $ 765,293 $ 795,341 12,890 (583,970) (203,209) (40,951) $ (19,899) AmTrust Quota Share Reinsurance $ 840,346 $ 727,781 — (494,633) (200,546) (1,949) $ 30,653 ACAC Quota Share $ 295,646 $ 280,658 — (183,745) (88,276) (737) 7,900 $ Total $ 1,901,285 $ 1,803,780 12,890 (1,262,348) (492,031) (43,637) 18,654 83,095 (4,362) 1,638 (36,384) (10,167) (2,213) (107) (3,644) $ 46,510 72.3% 68.0% 65.5% 25.1% 5.1% 102.5% 27.6% 0.2% 95.8% 31.5% 0.2% 97.2% 69.5% 27.1% 2.9% 99.5% F-18 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) For the Year Ended December 31, 2011 Net premiums written . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . Other insurance revenue. . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . Commission and other acquisition expenses . . . . General and administrative expenses . . . . . . . . . Underwriting income . . . . . . . . . . . . . . . . . Reconciliation to net income attributable to Maiden common shareholders Net investment income and realized and unrealized gains on investments. . . . . . . . . . . Amortization of intangible assets. . . . . . . . . . . . Foreign exchange gains . . . . . . . . . . . . . . . . . . Interest and amortization expenses. . . . . . . . . . . Accelerated amortization of junior subordinated debt discount and issuance cost . . . . . . . . . . . Junior subordinated debt repurchase expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Other general and administrative expenses . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . Income attributable to noncontrolling interest . . . Net income attributable to Maiden common shareholders . . . . . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expense ratio* . . . . Commission and other acquisition expense ratio** . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expense ratio*** . . . . Combined ratio**** . . . . . . . . . . . . . . . . . . Diversiﬁed Reinsurance $ 798,037 $ 748,387 12,640 (502,375) (200,239) (36,374) $ 22,039 AmTrust Quota Share Reinsurance $ 669,283 $ 558,197 — (380,263) (160,522) (2,283) $ 15,129 ACAC Quota Share $ 256,201 $ 245,844 — (160,416) (78,051) (1,635) 5,742 $ Total $ 1,723,521 $ 1,552,428 12,640 (1,043,054) (438,812) (40,292) 42,910 75,372 (5,033) 323 (34,155) (20,313) (15,050) (13,600) (1,927) (3) $ 28,524 66.0% 68.1% 65.3% 26.3% 4.8% 97.1% 28.8% 0.4% 97.3% 31.7% 0.7% 97.7% 66.6% 28.0% 3.5% 98.1% F-19 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) For the Year Ended December 31, 2010 Net premiums written . . . . . . . . . . . . . . . . . . . Net premiums earned . . . . . . . . . . . . . . . . . . . Net loss and loss adjustment expenses . . . . . . . . Commission and other acquisition expenses . . . . General and administrative expenses . . . . . . . . . Underwriting income . . . . . . . . . . . . . . . . . Reconciliation to net income attributable to Maiden common shareholders Net investment income and realized and unrealized gains on investments. . . . . . . . . . . Amortization of intangible assets. . . . . . . . . . . . Foreign exchange losses. . . . . . . . . . . . . . . . . . Interest and amortization expenses. . . . . . . . . . . Other general and administrative expenses . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . Loss attributable to noncontrolling interest . . . . . Net income attributable to Maiden common shareholders Net loss and loss adjustment expense ratio* . . . . Commission and other acquisition expense ratio** . . . . . . . . . . . . . . . . . . . . . . General and administrative expense ratio*** . . . . Combined ratio**** . . . . . . . . . . . . . . . . . . Diversiﬁed Reinsurance $ 554,049 $ 601,254 (394,604) (152,698) (26,123) $ 27,829 AmTrust Quota Share Reinsurance $ 468,043 $ 445,081 (280,890) (144,655) (1,500) $ 18,036 ACAC Quota Share $205,739 $123,455 (79,628) (39,344) (243) 4,240 $ Total $1,227,831 $1,169,790 (755,122) (336,697) (27,866) 50,105 78,255 (5,808) (580) (36,466) (14,314) (1,330) 4 $ 69,866 65.6% 63.1% 64.5% 25.4% 4.4% 95.4% 32.5% 0.3% 95.9% 31.9% 0.2% 96.6% 64.6% 28.8% 3.5% 96.9% * ** *** Calculated by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue. Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. **** Calculated by adding together net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio. F-20 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) The following table summarizes the ﬁnancial position of our operating segments as of December 31, 2012 and 2011: December 31, 2012 Reinsurance balances receivable, net . . . . . . . . . Funds withheld. . . . . . . . . . . . . . . . . . . . . . . . Prepaid reinsurance premiums. . . . . . . . . . . . . . Reinsurance recoverable on unpaid losses . . . . . . Deferred commission and other acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to related party . . . . . . . . . . . . . . . . . . . . Goodwill and intangible assets, net . . . . . . . . . . Restricted cash and cash equivalents and investments . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other assets . . . . . . . . . . . . . . . . Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 Reinsurance balances receivable, net . . . . . . . . . Funds withheld. . . . . . . . . . . . . . . . . . . . . . . . Prepaid reinsurance premiums. . . . . . . . . . . . . . Reinsurance recoverable on unpaid losses . . . . . . Deferred commission and other acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to related party . . . . . . . . . . . . . . . . . . . . Goodwill and intangible assets, net . . . . . . . . . . Restricted cash and cash equivalents and investments . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other assets . . . . . . . . . . . . . . . . Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . Diversiﬁed Reinsurance $ 260,161 42,712 38,725 110,858 AmTrust Quota Share Reinsurance $ 170,983 — — — 83,287 — 94,393 153,530 167,975 — ACAC Quota Share Total $ 91,470 — — — 33,852 — — $ 522,614 42,712 38,725 110,858 270,669 167,975 94,393 1,219,454 5,864 $1,855,454 857,013 — $1,349,501 90,851 — $216,173 2,167,318 722,899 $4,138,163 $ 244,610 42,605 35,381 20,289 $ 102,003 — — — 98,712 — 98,755 120,369 167,975 — $ 76,742 — — — 29,355 — — $ 423,355 42,605 35,381 20,289 248,436 167,975 98,755 1,063,010 2,429 $1,605,791 461,216 — $ 851,563 62,017 — $168,114 1,586,243 772,072 $3,395,111 F-21 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) The following table shows an analysis of the Company’s gross and net premiums written and net premiums earned by geographic location for the years ended December 31, 2012, 2011 and 2010. In case of business assumed from AmTrust Financial Services, Inc. (‘‘AmTrust’’), is the location of the relevant AmTrust subsidiaries. it For the Year Ended December 31, Gross premiums written − North America . . . . . . . . . . . . . . . . . . Gross premiums written − Other (predominantly Europe) . . . . . . . Net premiums written − North America . . . . . . . . . . . . . . . . . . . Net premiums written − Other (predominantly Europe) . . . . . . . . . Net premiums earned − North America. . . . . . . . . . . . . . . . . . . . Net premiums earned − Other (predominantly Europe) . . . . . . . . . 2012 $1,575,452 425,540 1,481,076 420,209 1,413,596 390,184 2011 $1,400,114 412,483 1,317,265 406,256 1,194,628 357,800 2010 $1,098,672 199,383 1,028,518 199,313 1,038,859 130,931 The following tables set forth ﬁnancial information relating to net premiums written by major line of business for the years ended December 31, 2012, 2011 and 2010: For the Year Ended December 31, 2012 2011 2010 Total % of Total Total % of Total Total % of Total Net premiums written Diversiﬁed Reinsurance Property . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . Accident and Health. . . . . . . . . . International . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . AmTrust Quota Share Reinsurance Small Commercial Business. . . . . Specialty Program . . . . . . . . . . . Specialty Risk and Extended Warranty . . . . . . . . . . . . . . . Total AmTrust Quota Share $ 190,125 433,307 37,244 104,617 765,293 10.0% $ 207,993 441,666 22.8% 42,604 2.0% 105,774 5.5% 798,037 40.3% 12.1% $ 168,919 311,852 25.6% 43,658 2.5% 29,620 6.1% 554,049 46.3% 13.8% 25.4% 3.5% 2.4% 45.1% 364,123 95,902 19.2% 5.0% 237,560 93,701 13.8% 5.4% 197,097 73,881 16.0% 6.0% 380,321 20.0% 338,022 19.6% 197,065 16.1% Reinsurance . . . . . . . . . . . . . 840,346 44.2% 669,283 38.8% 468,043 38.1% ACAC Quota Share Automobile Liability . . . . . . . . . Automobile Physical Damage . . . . . . . . . . . . . . . . Total ACAC Quota Share . . . . . . 159,861 8.4% 147,362 8.6% 117,962 9.6% 135,785 295,646 $1,901,285 108,839 7.1% 15.5% 256,201 100.0% $1,723,521 6.3% 14.9% 87,777 205,739 100.0% $1,227,831 7.2% 16.8% 100.0% F-22 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 3. Segment Information − (continued) The following tables set forth ﬁnancial information relating to net premiums earned by major line of business for the years ended December 31, 2012, 2011 and 2010: For the Year Ended December 31, 2012 2011 2010 Total % of Total Total % of Total Total % of Total Net premiums earned Diversiﬁed Reinsurance Property . . . . . . . . . . . . . . . . . Casualty . . . . . . . . . . . . . . . . . Accident and Health. . . . . . . . . . International . . . . . . . . . . . . . . . Total Diversiﬁed Reinsurance . . . . AmTrust Quota Share Reinsurance Small Commercial Business. . . . . Specialty Program . . . . . . . . . . . Specialty Risk and Extended Warranty . . . . . . . . . . . . . . . Total AmTrust Quota Share $ 211,997 444,775 41,968 96,601 795,341 11.7% $ 196,947 395,533 24.7% 43,210 2.3% 112,697 5.4% 748,387 44.1% 12.7% $ 176,538 356,389 25.5% 62,954 2.8% 5,373 7.3% 601,254 48.3% 15.1% 30.5% 5.4% 0.5% 51.5% 313,110 85,812 17.3% 4.8% 215,941 81,281 13.9% 5.2% 202,716 71,596 17.3% 6.1% 328,859 18.2% 260,975 16.8% 170,769 14.6% Reinsurance . . . . . . . . . . . . . 727,781 40.3% 558,197 35.9% 445,081 38.0% ACAC Quota Share Automobile Liability . . . . . . . . . Automobile Physical Damage . . . . . . . . . . . . . . . . Total ACAC Quota Share . . . . . . 4. Acquisitions a) IIS Acquisition 155,266 8.6% 141,173 9.1% 69,444 5.9% 125,392 280,658 $1,803,780 7.0% 15.6% 104,671 245,844 100.0% $1,552,428 6.7% 15.8% 54,011 123,455 100.0% $1,169,790 4.6% 10.5% 100.0% On November 30, 2010, the Company completed its IIS Acquisition, including renewal rights on nearly $100 million of predominantly personal auto quota share reinsurance as well as the supporting business development subsidiaries in Europe. The transaction includes the assumption of more than $100 million of loss reserves and net unearned premiums as well as the corresponding assets, and was funded through existing cash. The businesses primarily focus on providing branded auto and auto-related insurance products through its insurer partners to retail customers in the European Union and other global markets. The IIS Acquisition also includes the acquisition of GMAC Life Försäkrings AB (‘‘GMAC LF’’), a life insurance company organized under the laws of Sweden which writes credit life insurance on a primary basis. GMAC LF was renamed Maiden LF. Under the terms of the acquisition, the Company acquired 100% of the share capital and net assets of GMAC LF, GMAC Australia (Finance) Limited, GMAC VersicherungsService GmbH (subsequently renamed Opel Händler VersicherungsService GmbH (‘‘OVS’’) following a cooperation agreement being entered into with VDOH Wirtschaftsdienst GmbH (‘‘Opel Dealer Association’’) in Germany and the German auto manufacturer Opel in exchange for a 10% interest in OVS) and 60% of the share capital and net assets of GMAC VersicherungsService GmbH Austria. The agreement provided for a base purchase cost of $4,000 adjustable based on the renewal premium written net of commissions over the next three years plus an amount equal to the net assets of the acquired entities. F-23 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 4. Acquisitions − (continued) The Company ﬁnalized the purchase price allocation in 2011 which resulted in a total consideration of $21,632 (2010 estimate − $22,274). The Company recorded goodwill of $5,695 (2010 estimate − $5,812) and incurred non-recurring acquisition expenses of $1,841 as a result of the acquisition. The results of the operations have been included in the Company’s Consolidated Financial Statements since the acquisition date. The cost of acquisition was allocated to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date, with the amount exceeding the fair value recorded as goodwill. The fair value of the net assets acquired is summarized as follows: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for loss and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchase price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 Actual $14,971 450 13,480 303 5,695 34,899 4,739 5,454 3,074 13,267 $21,632 2010 Estimate $15,595 469 13,999 191 5,812 36,066 3,192 5,665 4,935 13,792 $22,274 In conjunction with the IIS Acquisition on November 30, 2010, Maiden Bermuda and GMAC International Insurance Company Ltd. (‘‘GMAC International Insurance’’) entered into a loss portfolio transfer and quota share reinsurance agreement under which Maiden Bermuda reinsured 100% of the existing contracts written by GMAC International Insurance in respect of the businesses acquired in the IIS Acquisition. As a result of the agreement, Maiden Bermuda assumed estimated liabilities of $122,574. The loss portfolio transfer and quota share reinsurance agreement required Maiden Bermuda to fund the existing funds withheld collateral arrangements of GMAC International Insurance and its cedants. The initial funds withheld collateral requirements were $140,520 and Maiden Bermuda transferred cash on closing in the amount of $26,204 in order to meet such collateral requirements. F-24 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 5. Investments a) Fixed Maturities and Other Investments The original or amortized cost, estimated fair value and gross unrealized gains and losses of available-for-sale ﬁxed maturities and other investments as of December 31, 2012 and 2011, are as follows: December 31, 2012 Available-for-sale securities: U.S. treasury bonds. . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . . . . U.S. agency bonds − other . . . . . . . . . . . . . . . . . . Non-U.S. government bonds. . . . . . . . . . . . . . . . . Other mortgage-backed bonds. . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale ﬁxed maturities . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . Total investments . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 Available-for-sale securities: U.S. treasury bonds. . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . . . . U.S. agency bonds − other . . . . . . . . . . . . . . . . . . Non-U.S. government bonds. . . . . . . . . . . . . . . . . Other mortgage-backed bonds. . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale ﬁxed maturities . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . Total investments . . . . . . . . . . . . . . . . . . . . . . . Original or amortized cost Gross unrealized gains Gross unrealized losses Fair value $ 42,671 962,649 11,682 55,169 23,167 1,247,260 132,604 2,475,202 2,599 $2,477,801 Original or amortized cost $ 44,175 928,944 10,374 52,489 9,919 742,867 168,338 1,957,106 1,955 $1,959,061 $ 1,260 30,998 1,407 2,264 901 113,386 1,244 151,460 353 $151,813 Gross unrealized gains $ 1,774 43,230 622 78 1 47,726 728 94,159 318 $94,477 $ — (1,473) — — — (6,492) — (7,965) (51) $(8,016) Gross unrealized losses $ 43,931 992,174 13,089 57,433 24,068 1,354,154 133,848 2,618,697 2,901 $2,621,598 Fair value $ — $ (75) — (293) — (30,236) — (30,604) (81) $(30,685) 45,949 972,099 10,996 52,274 9,920 760,357 169,066 2,020,661 2,192 $2,022,853 The contractual maturities of our ﬁxed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2012 Maturity Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through ﬁve years . . . . . . . . . . . . . . . . . . . . . Due after ﬁve years through ten years . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . . . . . . . . . . . . . . . Other mortgage-backed bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized cost Fair value % of Total Fair value $ 57,675 373,208 888,694 169,809 1,489,386 962,649 23,167 $2,475,202 $ 58,672 387,882 981,504 174,397 1,602,455 992,174 24,068 $2,618,697 2.2% 14.8% 37.5% 6.7% 61.2% 37.9% 0.9% 100.0% F-25 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 5. Investments − (continued) The following tables summarize ﬁxed maturities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position: December 31, 2012 Available-for-sale securities: U.S. agency bonds − mortgage-backed . . . Corporate bonds . . . . . . . . . . . Other investments . . . . . . . . . Total temporarily impaired available-for-sale securities and other investments. . . . . . Less than 12 Months Fair value Unrealized losses 12 Months or More Fair value Unrealized losses Total Fair value Unrealized losses $ $158,591 94,742 253,333 — $(1,473) (1,098) (2,571) — — $ — $158,591 236,584 395,175 2,011 (5,394) (5,394) (51) 141,842 141,842 2,011 $(1,473) (6,492) (7,965) (51) $253,333 $(2,571) $143,853 $(5,445) $397,186 $(8,016) As of December 31, 2012, there were approximately 32 securities in an unrealized loss position with a fair value of $397,186 and unrealized losses of $8,016. 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 $143,853 and unrealized losses of $5,445. December 31, 2011 Available-for-sale securities: U.S. agency bonds − mortgage-backed . . . Non-U.S. government bonds. . . Corporate bonds . . . . . . . . . . . Other investments . . . . . . . . . Total temporarily impaired available-for-sale securities and other investments. . . . . . Less than 12 Months Fair value Unrealized losses 12 Months or More Fair value Unrealized losses Total Fair value Unrealized losses $ 30,447 43,629 227,367 301,443 1,214 $ (75) (293) (7,406) (7,774) (81) $ — $ — 125,089 125,089 — — $ 30,447 43,629 — 352,456 (22,830) 426,532 (22,830) 1,214 — $ (75) (293) (30,236) (30,604) (81) $302,657 $(7,855) $125,089 $(22,830) $427,746 $(30,685) As of December 31, 2011, there were approximately 62 securities in an unrealized loss position with a fair value of $427,746 and unrealized losses of $30,685. 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 $125,089 and unrealized losses of $22,830. OTTI We review our investment portfolio for impairment on a quarterly basis. Impairment of investments results in a charge to operations when a fair value decline below cost is deemed to be other-than-temporary. As of December 31, 2012, we reviewed our portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. During the years ended December 31, 2012, 2011 and 2010, the Company recognized no OTTI. Based on our qualitative and quantitative OTTI review of each investment within our ﬁxed maturity portfolio, unrealized losses on ﬁxed maturities at December 31, 2012, were primarily due to widening of credit spreads F-26 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 5. Investments − (continued) 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 December 31, 2012. The following summarizes the credit ratings of our ﬁxed maturities: Rating* as of December 31, 2012 U.S. treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rating* as of December 31, 2011 U.S. treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Amortized cost 42,671 974,331 171,136 186,495 477,236 587,858 35,475 $2,475,202 $ Amortized cost 44,175 939,318 160,319 150,961 327,794 316,150 18,389 $1,957,106 $ Fair value 43,931 1,005,263 183,950 196,797 515,383 637,089 36,284 $2,618,697 $ Fair value 45,949 983,095 161,945 153,303 328,448 330,156 17,765 $2,020,661 % of Total fair value 1.7% 38.4% 7.0% 7.5% 19.7% 24.3% 1.4% 100.0% % of Total fair value 2.3% 48.6% 8.0% 7.6% 16.3% 16.3% 0.9% 100.0% * Ratings as assigned by S&P b) Other Investments The table below shows our portfolio of other investments: December 31, Investment in limited partnerships . . . . . . . . . . . . . . Total other investments . . . . . . . . . . . . . . . . . . . . 2012 2011 $2,901 $2,901 100.0% $2,192 100.0% $2,192 100.0% 100.0% The Company has an unfunded commitment on its investment in limited partnerships of approximately $3,099 as of December 31, 2012. F-27 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 5. Investments − (continued) c) Net Investment Income Net investment income was derived from the following sources: For the Year Ended December 31, Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . Funds withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on securities sold under agreements 2012 $79,891 1,439 1,648 1,945 84,923 2011 $72,050 925 4,235 1,925 79,135 2010 $71,607 1,680 407 1,996 75,690 (3,735) (3,488) (2,992) to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $81,188 (756) $74,891 (1,047) $71,651 d) Realized and Unrealized Gains (Losses) on Investments Realized gains or losses on the sale of investments are determined on the basis of the ﬁrst in ﬁrst out cost method and include any adjustments to the cost basis of investments for declines in value that are considered to be other-than-temporary. The following provides an analysis of net realized and unrealized gains on investment: For the Year Ended December 31, 2012 Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . Trading securities and short sales . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains on investments . . . . . . . . . . . . . . . . For the Year Ended December 31, 2011 Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . Trading securities and short sales . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses on short sales . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains on investments . . . . . For the Year Ended December 31, 2010 Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . Trading securities and short sales . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains on investments . . . . . . . . . . . . . . . . Gross gains $3,468 — 55 $3,523 Gross gains $5,091 2,709 43 7,843 — $7,843 Gross gains $10,372 6,372 — $16,744 $ Gross losses (13) (1,592) (11) $(1,616) Gross losses $(1,812) (1,902) (116) (3,830) (3,532) $(7,362) Gross losses $ (1,976) (7,915) (249) $(10,140) Net $ 3,455 (1,592) 44 $ 1,907 Net $ 3,279 807 (73) 4,013 (3,532) 481 $ Net $ 8,396 (1,543) (249) $ 6,604 Proceeds from sales of ﬁxed maturities classiﬁed as available-for-sale were $142,694, $304,499 and $331,593, and for the years ended December 31, 2012, 2011 and 2010, respectively. F-28 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 5. Investments − (continued) Net unrealized gains (losses) were as follows: December 31, Available-for-sale securities. . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . Total net unrealized gains . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains, net of deferred income tax . . . . . Change in net unrealized gains, net of deferred 2012 $143,495 302 143,797 (132) $143,665 2011 $63,555 237 63,792 (55) $63,737 2010 $54,658 96 54,754 — $54,754 income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,928 $ 8,983 $22,007 e) Restricted Cash and Cash Equivalents and Investments We are required to maintain assets on deposit to support our reinsurance operations and to serve as collateral for our reinsurance liabilities under various reinsurance agreements. The assets on deposit are available to settle reinsurance liabilities. We also utilize trust accounts to collateralize business with our reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trust as collateral are primarily highly rated ﬁxed maturity securities. The fair value of our restricted assets was as follows: December 31, Restricted cash and cash equivalents − third party agreements . . . . . . Restricted cash and cash equivalents − related party agreements . . . . . Restricted cash and cash equivalents − U.S. state regulatory authorities Total restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Restricted investments – in trust for third party agreements at fair value (Amortized cost: 2012 − $1,048,827; 2011 − $950,103) Restricted investments – in trust for related party agreements at fair . . . . $ 2012 97,695 33,882 750 132,327 $ 2011 67,627 46,729 539 114,895 1,101,971 972,130 value (Amortized cost: 2012 − $851,873; 2011 − $458,105) . . . . . . 919,557 485,468 Restricted investments – in trust for U.S. state regulatory authorities (Amortized cost: 2012 − $12,744; 2011 − $12,862) . . . . . . . . . . . . Total restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total restricted cash and cash equivalents and investments . . . . . 13,463 2,034,991 $2,167,318 13,750 1,471,348 $1,586,243 f) Other Securities sold but not yet purchased represent obligations of the Company to deliver the speciﬁed security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices. The Company’s liability for securities to be delivered is measured at their fair value and as of December 31, 2012 was $0 (December 31, 2011 − $55,830). This amount was included in accrued expenses and other liabilities in the Consolidated Balance Sheets. Collateral of an equivalent amount was pledged to the clearing broker. 6. Fair Value Measurements a) Fair Values of Financial Instruments ASC 825, ‘‘Disclosure About Fair Value of Financial Instruments’’, requires all entities to disclose the fair value of their ﬁnancial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. F-29 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 6. Fair Value Measurements − (continued) The following describes the valuation techniques used by the Company to determine the fair value of ﬁnancial instruments held as of December 31, 2012. U.S. Government and U.S. Government agencies — Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy. Non-U.S. government bonds — Comprised of bonds issued by non-U.S. governments and their agencies along with supranational organizations. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the signiﬁcant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government bonds are included in the Level 2 fair value hierarchy. Other mortgage-backed securities — Other mortgage-backed commercial mortgage-backed security (‘‘CMBS’’). This security is priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the signiﬁcant inputs used to price the CMBS are observable market inputs, the fair value of the CMBS is included in the Level 2 fair value hierarchy. consist bonds of a Corporate bonds — Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate (‘‘LIBOR’’) yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker dealers. As the signiﬁcant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy. Municipal bonds — Municipal bonds comprise bonds and auction rate securities issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the signiﬁcant inputs used to price the municipal bonds are observable market inputs, municipals are classiﬁed within Level 2. Municipal auction rate securities are reported in the Consolidated Balance Sheets at cost which approximates their fair value. Other investments — The fair values of the investment in limited partnerships are determined by the fund manager based on recent ﬁlings, operating results, balance sheet stability, growth and other business and market sector fundamentals, and as such, the fair values are included in the Level 3 fair value hierarchy. Reinsurance balance receivable — The carrying values reported in the accompanying balance sheets for these ﬁnancial instruments approximate their fair value due to short term nature of the assets. F-30 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 6. Fair Value Measurements − (continued) Loan to related party — The carrying value reported in the accompanying balance sheets for this ﬁnancial instrument approximates its fair value. The underlying investments of the loan are generally priced by pricing services. As the signiﬁcant inputs used to price the underlying investments are observable market inputs, the fair value of the loan to related party is included in the Level 2 fair value hierarchy. Senior notes — The amount reported in the accompanying balance sheets for these ﬁnancial instruments represents the carrying value of the notes. The fair values are based on quoted prices of identical instruments in inactive markets and as such, are included in the Level 2 hierarchy. Junior subordinated debt — The amount reported in the accompanying balance sheets for this ﬁnancial instrument represents the carrying value of the debt. The fair value of the debt was derived using the Black-Derman-Toy model. As the fair value of the junior subordinated debt is determined using observable market inputs in the Black-Derman-Toy model, the fair value is included in the Level 2 fair value hierarchy. b) Fair Value Hierarchy The Company’s estimates of fair value for ﬁnancial assets and ﬁnancial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the signiﬁcant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reﬂect the Company’s signiﬁcant market assumptions. In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. At December 31, 2012 and 2011, we classiﬁed our ﬁnancial instruments measured at fair value on a recurring basis in the following valuation hierarchy: December 31, 2012 Assets Fixed maturities U.S. treasury bonds . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . U.S. agency bonds − other . . . . . . . . . . . . . . . Non-U.S. government bonds . . . . . . . . . . . . . Other mortgage-backed securities . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . Municipal bonds. . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of total assets . . . . . . . . . . . . . Quoted Prices in Active Markets for Identical Assets (Level 1) Signiﬁcant Other Observable Inputs (Level 2) Signiﬁcant Unobservable Inputs (Level 3) $43,931 — — — — — — — $43,931 $ — 992,174 13,089 57,433 24,068 1,354,154 133,848 — $2,574,766 $ — — — — — — — 2,901 $2,901 Total Fair Value $ 43,931 992,174 13,089 57,433 24,068 1,354,154 133,848 2,901 $2,621,598 1.1% 62.2% 0.1% 63.4% F-31 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 6. Fair Value Measurements − (continued) December 31, 2011 Assets Fixed maturities U.S. treasury bonds . . . . . . . . . . . . . . . . . . . U.S. agency bonds – mortgage-backed. . . . . . . U.S. agency bonds – other . . . . . . . . . . . . . . . Non-U.S. government bonds . . . . . . . . . . . . . Other mortgage-backed securities . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . Municipal bonds. . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of total assets . . . . . . . . . . . . . Liabilities Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . As a percentage of total liabilities . . . . . . . . . . Quoted Prices in Active Markets for Identical Assets (Level 1) Signiﬁcant Other Observable Inputs (Level 2) Signiﬁcant Unobservable Inputs (Level 3) $45,949 — — — — — — — $45,949 $ — 972,099 10,996 52,274 9,920 760,357 169,066 — $1,974,712 $ — — — — — — — 2,192 $2,192 Total Fair Value $ 45,949 972,099 10,996 52,274 9,920 760,357 169,066 2,192 $2,022,853 1.4% 58.1% 0.1% 59.6% $ — $ 55,830 $ — $ 55,830 —% 2.1% —% 2.1% The Company utilized a pricing service to estimate fair value measurements for approximately 99.7% of its ﬁxed maturities. The pricing service utilizes market quotations for ﬁxed maturity securities that have quoted market prices in active markets. Since ﬁxed maturities other than U.S. treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classiﬁed as level 2. Other investments: The Company has $2,901 or approximately 0.1% of its investment portfolio in limited partnerships where the fair value estimate is determined by the fund manager based on recent ﬁlings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the signiﬁcant unobservable inputs in these valuations, the Company includes the estimate in the amount disclosed as Level 3. The Company has determined that its investments in Level 3 securities are not material to its ﬁnancial position or results of operations. F-32 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 6. Fair Value Measurements − (continued) c) Level 3 Financial Instruments The following table presents changes in Level 3 for our ﬁnancial instruments measured at fair value on a recurring basis for the years ended December 31, 2012 and 2011: Other investments: Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains − included in net income . . . . . . . . . . . . . Net realized and unrealized (losses) − included in net income. . . . . . . . . . . . Change in net unrealized gains − included in other For the Year Ended December 31, 2012 $2,192 44 — 2011 $ 5,847 — (73) comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 141 Change in net unrealized losses – included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Level 3 gains (losses) included in net income attributable to the change in — 940 (340) — — $2,901 — 1,173 (4,896) — — $ 2,192 unrealized gains (losses) relating to assets held at the reporting date . . . . . $ — $ — d) Fair Value of Liabilities The following table presents the carrying values and fair values of the Senior Notes and Junior Subordinated Debt as of December 31, 2012 and 2011: Carrying Value Interest Rate 8.25% $107,500 100,000 8.00% 126,317 14.00% December 31, 2012 Fair Value $112,832 105,600 166,919 December 31, 2011 Fair Value $104,888 — 173,621 Carrying Value $107,500 — 126,263 2011 Senior Notes . . . . . . . . . . . . . . . . . . 2012 Senior Notes . . . . . . . . . . . . . . . . . . Junior Subordinated Debt . . . . . . . . . . . . . 7. Goodwill and Intangible Assets Goodwill Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. The Company performs an annual impairment analysis to identify potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized. This annual test is performed during the fourth quarter of each year or more frequently if events or circumstances change in a way that requires the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing requires an evaluation of the estimated fair value of each reporting unit to its carrying value, including the goodwill. An impairment charge is recorded if the estimated fair value is less than the carrying amount of the reporting unit. No impairments have been identiﬁed to date. F-33 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 7. Goodwill and Intangible Assets − (continued) Intangible Assets Intangible assets consist of ﬁnite and indeﬁnite life assets. Finite life intangible assets include customer Insurance company licenses are considered indeﬁnite life and producer intangible assets subject to annual impairment testing. relationships and trademarks. The following tables show the analysis of goodwill and intangible assets: December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment during the year . . . . . . . . . . . . . . . . . . . . . . . Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill $58,429 (117) — 58,312 — $58,312 Intangible Assets $45,476 — (5,033) 40,443 (4,362) $36,081 Total $103,905 (117) (5,033) 98,755 (4,362) $ 94,393 December 31, 2012 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . State licenses . . . . . . . . . . . . . . . . . . . . . . . Gross $ 58,312 7,727 Accumulated Amortization — $ — Customer relationships . . . . . . . . . . . . . . . . . Net balance . . . . . . . . . . . . . . . . . . . . . . . . 51,400 $117,439 (23,046) $(23,046) December 31, 2011 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . State licenses . . . . . . . . . . . . . . . . . . . . . . . Gross $ 58,312 7,727 Accumulated Amortization — $ — Customer relationships . . . . . . . . . . . . . . . . . Net balance . . . . . . . . . . . . . . . . . . . . . . . . 51,400 $117,439 (18,684) $(18,684) Net $58,312 7,727 28,354 $94,393 Net $58,312 7,727 32,716 $98,755 Useful Life Indeﬁnite Indeﬁnite 15 years double declining Useful Life Indeﬁnite Indeﬁnite 15 years double declining The goodwill and intangible assets were recognized as a result of the IIS Acquisition (see note 4) and the including its book of assumed acquisition of the reinsurance operations of GMAC Insurance (‘‘GMACI’’), reinsurance business, GMAC RE Insurance Services LLC (renamed Maiden Re), GMAC Direct Insurance Company (renamed Maiden US) and Integon Specialty Insurance Company (renamed Maiden Specialty) (referred to as the ‘‘GMAC Acquisition’’) on October 31, 2008. The goodwill and intangible assets are assigned to Diversiﬁed Reinsurance segment and are subject to annual impairment testing. No impairment was recorded during the years ended December 31, 2012, 2011 and 2010. However, during 2011 as a result of the adjusted price allocation relating to the IIS Acquisition, the amount of goodwill was reduced to $5,695 (2010 − $5,812). The estimated amortization of intangible assets for the next ﬁve years is: 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,781 3,276 2,840 2,461 2,133 F-34 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 8. Long-Term Debt Senior Notes In June 2011, the Company, through its wholly owned subsidiary Maiden Holdings North America, Ltd. (‘‘Maiden NA’’), issued $107,500 principal amount of 8.25% Senior Notes (‘‘2011 Senior Notes’’) due on June 15, 2041, which are fully and unconditionally guaranteed by the Company. 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 plus accrued and unpaid interest to but excluding the redemption date. In order to ensure that issuance of the 2011 Senior Notes resulted in a long term favorable impact to Maiden’s shareholders, the Company sought to repurchase a portion of the Trust Preferred Securities, described below, with the proceeds of the 2011 Senior Notes offering. Under the redemption notice provisions of the Trust Preferred Securities, the Company was required to give at least 30 days’ notice in advance of the next interest payment (July 15, 2011) prior to redemption, or incur an additional quarter’s interest payments. Since the 2011 Senior Notes offering was initiated after the 30 day notice period on June 16, 2011, the Company offered to all holders an option to have a portion of their Trust Preferred Securities repurchased on a pro rata basis from the proceeds of the 2011 Senior Notes offering in exchange for a waiver of such notice provisions and an agreement to accept interest through July 15, 2011. Certain of the Trust Preferred Securities holders accepted the offer by June 16, 2011. All proceeds of the 2011 Senior Notes offering were used to repurchase the Trust Preferred Securities of the holders who accepted the offer. The 2011 Senior Notes are an unsecured and unsubordinated obligation of the Company and rank ahead of the Junior Subordinated Debt, described below. The effective interest rate of the 2011 Senior Notes, based on the net proceeds received, was 8.47%. The net proceeds from the sale of the 2011 Senior Notes were $104,689, after placement agent fees and expense or debt issuance cost of $2,811, and were used to repurchase $107,500 principal amount portion of the outstanding Junior Subordinated Debt. The issuance costs related to the 2011 Senior Notes were capitalized and will be amortized over the life of the notes. Amortization expense for the year ended December 31, 2012 was $94 (for the period from June 15, 2011 to December 31, 2011 − $49). The interest on the 2011 Senior Notes is payable each quarter beginning on September 15, 2011. Interest expense for the year ended December 31, 2012 was $8,869 (for the period from June 15, 2011 to December 31, 2011 − $4,607), of which $394 was accrued as of December 31, 2012 (2011 − $394). In March 2012, the Company, through Maiden NA, issued $100,000 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 up to but excluding the redemption date. The 2012 Senior Notes are an unsecured and unsubordinated obligation of the Company and rank ahead of the Junior Subordinated Debt, described below. The effective interest rate of the 2012 Senior Notes, based on the net proceeds received, was 8.28%. The net proceeds from the sale of the 2012 Senior Notes were $96,594, after placement agent fees and other expenses of $3,406, and will be used for general corporate purposes and working capital. The issuance costs related to the 2012 Senior Notes were capitalized and will be amortized over the life of the notes. Amortization expense for the period from March 27, 2012 to December 31, 2012 was $87. The interest on the 2012 Senior Notes is payable each quarter beginning on June 27, 2012 and will include accrued interest from March 27, 2012. Interest expense for the period from March 27, 2012 to December 31, 2012 was $6,111, of which $111 was accrued as of December 31, 2012. Junior Subordinated Debt On January 20, 2009, the Company completed a private placement of 260,000 units (the ‘‘Units’’), each Unit consisting of $1,000 principal amount of capital securities (the ‘‘Trust Preferred Securities’’) of Maiden Capital Financing Trust (the ‘‘Trust’’), a special purpose trust established by Maiden NA, and 45 common shares, $0.01 par value, of the Company for a purchase price of $1,000.45 per Unit (the ‘‘TRUPS Offering’’). F-35 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 8. Long-Term Debt − (continued) In the aggregate, 11,700,000 common shares were issued to the purchasers in the TRUPS Offering. This resulted in gross proceeds to the Company of $260,117, before $4,342 of placement agent fees and expenses. Certain trusts established by Michael Karfunkel and George Karfunkel, two of the Company’s Founding Shareholders, purchased an aggregate of 159,000 of the Units, or 61.12%. The remaining 101,000 Units were purchased by existing institutional shareholders of the Company. The Trust used the proceeds from the sale of the Trust Preferred Securities to purchase a subordinated debenture (the ‘‘Junior Subordinated Debt’’) in the principal amount of $260,000 issued by Maiden NA. Under the terms of the Trust Preferred Securities, 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 (adjusted for the $107,500 repurchase of Junior Subordinated Debt, which occurred on July 15, 2011), the additional amount due would be $21,350, which would be a reduction in earnings. Pursuant to separate Guarantee Agreements dated as of January 20, 2009 with Wilmington Trust Company, as guarantee trustee, each of the Company and Maiden NA has agreed to guarantee the payment of distributions and payments on liquidation or redemption of the Trust Preferred Securities. As a consequence of the issuance of a majority of the Units to a related party under ASC Topic 810 ‘‘Consolidation’’, the Trust is a variable interest entity and the Company is deemed not to be the primary beneﬁciary of the Trust, therefore it is not consolidated. The issuance of common shares associated with the Trust Preferred Securities resulted in an original issuance discount of $44,928 based on market price of $3.85 on January 20, 2009. The discount is amortized over 30 years based on the effective interest method. The Junior Subordinated Debt and Trust Preferred Securities mature in 2039 and carry a stated or coupon rate of 14% with an effective interest rate of 16.95%. Using the proceeds from the 2011 Senior Notes offering and existing cash, the Company repurchased principal amount of $107,500 of the Junior Subordinated Debt on July 15, 2011. Pursuant to the terms of the TRUPS Offering, the Company incurred and paid a repurchase expense equivalent to one year’s interest expense of $15,050. The Company also accelerated the amortization of the issuance cost and discount related to the repurchased Junior Subordinated Debt which amounted to $20,313. As of December 31, 2012, the stated value of the Junior Subordinated Debt was $126,317 which comprises the principal amount of $152,500 and unamortized discount of $26,183. Amortization expense for the year ended December 31, 2012 was $54 (2011 − $46, 2010 − $66). Interest expense for the year ended December 31, 2012 was $21,350 (2011 − $29,502, 2010 − $36,400), of which $4,448 was accrued as of December 31, 2012 (2011 − $4,448). 9. Reinsurance The Company utilizes reinsurance and retrocessional reinsurance (‘‘ceded reinsurance’’) agreements to reduce its exposure to large claims and catastrophic loss occurrences with various reinsurance companies. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the Company of its obligations to the policyholders. The Company remains liable to the extent that any reinsurance company fails to meet its obligations. Losses and LAE incurred and premiums earned are reported after deduction for reinsurance. In the event that one or more of the reinsurers are unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances. F-36 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 9. Reinsurance − (continued) The effect of retrocessional activity on net premiums written and earned and on net loss and loss adjustment expenses for the years ended December 31, 2012, 2011 and 2010 was as follows: For the Year Ended December 31, Premiums written Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premiums earned Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss and loss adjustment expenses Gross loss and loss adjustment expenses . . . . . . . . . . Loss and loss adjustment expenses ceded . . . . . . . . . . Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 2010 $ 122,412 1,878,580 (99,707) $1,901,285 $ 114,036 1,698,561 (89,076) $1,723,521 $ 71,625 1,226,430 (70,224) $1,227,831 $ 119,398 1,780,745 (96,363) $1,803,780 $ 112,308 1,523,685 (83,565) $1,552,428 $ 68,967 1,168,116 (67,293) $1,169,790 $1,457,404 (195,056) $1,262,348 $1,103,821 (60,767) $1,043,054 $ 788,815 (33,693) $ 755,122 The reinsurers with the three largest balances accounted for 30.2%, 18.0% and 11.4%, respectively, of the Company’s reinsurance recoverable on unpaid losses balance at December 31, 2012 (2011 − 31.1%, 26.2% and 12.6%, respectively). At December 31, 2012, 88.4% of the reinsurance recoverable on unpaid loss and loss adjusted expenses ceded was due from reinsurers with credit ratings from A.M Best of A, or better, 11.3% due from reinsurers with credit ratings of A- and the remaining 0.3% of the reinsurance recoverable was primarily due from state pools. At December 31, 2012 and 2011, the Company had no valuation allowance against reinsurance recoverable on unpaid losses. 10. Reserve for Loss and Loss Adjustment Expenses Our reserve for loss and loss adjustment expenses comprise the following: December 31, Reserve for reported loss and loss adjustment expenses . . . . . . . . . . . Reserve for losses incurred but not reported . . . . . . . . . . . . . . . . . . Reserve for loss and loss adjustment expenses . . . . . . . . . . . . . . . . . 2012 $1,029,594 710,687 $1,740,281 2011 $ 820,795 577,643 $1,398,438 F-37 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 10. Reserve for Loss and Loss Adjustment Expenses − (continued) The following table represents a reconciliation of our beginning and ending net losses and loss expense reserves: For the Year Ended December 31, Gross unpaid loss and loss adjustment expenses 2012 2011 2010 reserves at beginning of period . . . . . . . . . . . . . . . $ 1,398,438 $1,226,773 $1,002,676 Less: reinsurance recoverable on unpaid losses at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 20,289 6,656 8,340 Net loss and loss adjustment expense reserves at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 1,378,149 1,220,117 994,336 Net incurred losses related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net paid losses related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired loss and loss expense reserve . . . . . . . . . . . Effect of foreign exchange movements. . . . . . . . . . . . Net loss and loss adjustment expense reserves at 1,239,016 23,332 1,262,348 1,028,855 14,199 1,043,054 (485,015) (530,294) (1,015,309) — 4,235 (456,149) (423,855) (880,004) 450 (5,468) 787,967 (32,845) 755,122 (365,343) (265,991) (631,334) 102,020 (27) end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,629,423 1,378,149 1,220,117 Reinsurance recoverable on unpaid losses at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,858 20,289 6,656 Gross unpaid loss and loss adjustment expenses reserves at end of period . . . . . . . . . . . . . . . . . . $ 1,740,281 $1,398,438 $1,226,773 Management believes that its use of both historical experience and industry-wide loss development factors provide a reasonable basis for estimating future losses. As the Company writes more business and develops more credible data, the Company expects to assign more weight to its own historical experience than to AmTrust’s historical experience and industry-wide results. In either case, future events beyond the control of management, such as changes in law, interpretations of law, and inﬂation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE reserves. judicial The anticipated effect of inﬂation is implicitly considered when estimating liabilities for losses and LAE. While anticipated changes in claim costs due to inﬂation are considered in estimating the ultimate claim costs, changes in average severity of claims are caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modiﬁed if necessary. During 2012, the Company recorded estimated net adverse development on prior year loss reserves of $23,332 compared to net adverse development of $14,199 in the prior year and net favorable development of $32,845 in 2010. Included in the total is $9,134 (2011 − $28,898, 2010 − $25,332) of gains relating to the loss portfolio transfers acquired as part of the GMAC Acquisition and the IIS Acquisition. The total gain to date from the loss portfolio transfer reserves is $75,656 (2011 − $68,882, 2010 − $43,811) of which $4 remains as of December 31, 2012 (2011 − $2,570). The gain is being amortized into income in proportion to the actual paydown of the reserves acquired. F-38 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 10. Reserve for Loss and Loss Adjustment Expenses − (continued) Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves ﬁrst reported in previous calendar years. The development reﬂects changes in the actuarial assessments of the ultimate losses under the relevant reinsurance policies. 11. Related Party Transactions The Founding Shareholders of the Company are Michael Karfunkel, George Karfunkel and Barry Zyskind. Michael Karfunkel is the non-executive chairman of the board of AmTrust Financial Services, Inc. (‘‘AmTrust’’), George Karfunkel is a director of AmTrust, and Barry Zyskind is the president, chief executive officer and director of AmTrust. The Founding Shareholders own or control approximately 59% of the outstanding shares of AmTrust. In addition, the Michael Karfunkel 2005 Grantor Retained Annuity Trust (which is controlled by Leah Karfunkel, wife of Michael Karfunkel) (‘‘Annuity Trust’’), currently owns 72.4% of the issued and outstanding common stock of American Capital Acquisition Corporation (‘‘ACAC’’), Michael Karfunkel currently owns 27.6% of ACAC’s issued and outstanding common stock, and AmTrust owns preferred shares convertible into 21.25% of the issued and outstanding common stock of ACAC (see below for a description of our common business arrangements with AmTrust and ACAC). Michael Karfunkel is the Chairman and Chief Executive Officer of ACAC. AmTrust The following describes transactions between the Company and AmTrust. AmTrust Quota Share Reinsurance Agreement Effective July 1, 2007, the Company and AmTrust entered into a master agreement, as amended (the ‘‘Master Agreement’’), by which they caused Maiden Bermuda, a wholly owned subsidiary of the Company, and AmTrust’s Bermuda reinsurance subsidiary, AmTrust International Insurance, Ltd. (‘‘AII’’), to enter into a quota share reinsurance agreement (the ‘‘Reinsurance Agreement’’) by which (a) AII retrocedes to Maiden Bermuda an amount equal to 40% of the premium written by subsidiaries of AmTrust, net of the cost of unaffiliated inuring reinsurance (and in the case of AmTrust’s U.K. insurance subsidiary, AmTrust Europe, Limited, net of commissions) and 40% of losses and (b) AII transferred to Maiden Bermuda 40% of the AmTrust subsidiaries’ unearned premiums, effective July 1, 2007, with respect to the current lines of business, excluding risks for which the AmTrust subsidiaries’ net retention exceeds $5,000 (‘‘Covered Business’’). Effective January 1, 2010, the Company agreed to assume its proportionate share of AmTrust’s workers’ compensation exposure and shared the beneﬁt of the 2010 excess reinsurance protection. AmTrust also has agreed to cause AII, subject to regulatory requirements, to reinsure any insurance company which writes Covered Business in which AmTrust acquires a majority interest to the extent required to enable AII to cede to Maiden Bermuda 40% of the premiums and losses related to such Covered Business. The Master Agreement further provided that AII receives a ceding commission of 31% of ceded written premiums. On June 11, 2008, Maiden Bermuda and AII amended the Reinsurance Agreement to add Retail Commercial Package Business to the Covered Business as a consequence of AmTrust’s acquisition of Unitrin Business Insurance (‘‘UBI’’). Under the amendment, AmTrust’s subsidiaries ceded, upon collection, to Maiden Bermuda 100% of $82.2 million of unearned premium (net of inuring reinsurance) from the acquisition of UBI’s in-force book of business. Additionally, AmTrust cedes to Maiden Bermuda 40% of net premium written, effective as of June 1, 2008. Maiden Bermuda will pay to AmTrust a ceding commission of 34.375% on the unearned premium cession and the Retail Commercial Package Business. The $2,000 maximum liability for a single loss provided in the Reinsurance Agreement shall not be applicable to Retail Commercial Package Business. On February 9, 2009, Maiden Bermuda and AII amended the Reinsurance Agreement to clarify that (i) AII would offer Maiden Bermuda the opportunity to reinsure Excess Retention Business, which is deﬁned as a policy issued by an AmTrust insurance subsidiary with respect to which the insurance subsidiary’s retention is greater F-39 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 11. Related Party Transactions − (continued) than $5,000 and (ii) the deduction for the cost of inuring reinsurance from Affiliate Subject Premium (as deﬁned in the Reinsurance Agreement) retroceded to Maiden Bermuda is net of ceding commission. Effective April 1, 2011, Maiden Bermuda and AII amended the Master Agreement to reduce the commission on all business ceded except Retail Commercial Package Business to 30% until December 31, 2011. Thereafter the rate shall be 31% subject to an adjustment of 1% to 30% if the proportion of Specialty Risk and Extended Warranty premium ceded is greater than or equal to 42% of the Covered Business (excluding Retail Commercial Package Business). If the proportion of Specialty Risk and Extended Warranty premium ceded is greater than or equal to 38% but less than 42% of the Covered Business (excluding Retail Commercial Package Business), the commission rate shall be reduced by 0.5% to 30.5%. In addition, the collateral requirements were restated to clarify that balances relating to all AmTrust subsidiaries are subject to collateral requirements and the Reinsurance Agreement was extended by one year through June 30, 2014, and shall automatically renew for successive three-year periods thereafter. If the AII or Maiden Bermuda elects to so terminate the Reinsurance Agreement, it shall give written notice to the other party hereto not less than nine months prior to either July 1, 2014 or the expiration of any successive three-year period. In addition, either party is entitled to terminate on thirty days ’ notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of AII or Maiden Bermuda, run-off, or a reduction of 50% or more of the shareholder’s equity of Maiden Bermuda or the combined shareholders’ equity of AII and the AmTrust subsidiaries. Maiden Bermuda recorded approximately $185,574, $150,140 and $139,092 of ceding commission expense for the years ended December 31, 2012, 2011 and 2010, respectively, as a result of this transaction. AmTrust European Hospital Liability Quota Share Agreement Quota Share’’) (‘‘European Hospital Liability Effective April 1, 2011, the Company, through Maiden Bermuda, entered into a quota share reinsurance contract with AmTrust Europe Limited and AmTrust International Underwriters Limited, both wholly owned to the terms of the contract, Maiden Bermuda assumed 40% of the subsidiaries of AmTrust. Pursuant premiums and losses related to policies classiﬁed as European Hospital Liability, including associated liability coverages and policies covering physician defense costs, written or renewed on or after April 1, 2011. The contract also covers policies written or renewed on or before March 31, 2011, but only with respect to losses that occur, accrue or arise on or after April 1, 2011. The maximum limit of liability attaching shall be €5,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Maiden Bermuda will pay a ceding commission of 5% and shall allow the reinsured a proﬁt share on original net premiums ceded under the contract. 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. Effective January 1, 2012, the quota share reinsurance contract with AmTrust Europe Limited and AmTrust International Underwriters Limited was amended, thereby increasing the maximum liability attaching to €10,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Furthermore, amendments were also made to the contract to expand the territorial scope to include new territories, speciﬁcally France. For the year ended December 31, 2012, the Company recorded approximately $5,876 (2011 − $3,405) of commission expense as a result of this transaction. Other Reinsurance Agreements Effective January 1, 2008, Maiden Bermuda and AmTrust entered into an agreement to reinsure a 45% participation in the $9,000 in excess of $1,000 layer of AmTrust’s workers’ compensation excess of loss program. This layer provides reinsurance to AmTrust for losses per occurrence in excess of $1,000 up to F-40 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 11. Related Party Transactions − (continued) $10,000, subject to an annual aggregate deductible of $1,250. This participation was sourced through a in which competitive bids were solicited by an reinsurance intermediary via open market placement independent broker. The remaining 55% participation was placed with a single carrier. This coverage expired on January 1, 2010; as a result, under the Reinsurance Agreement, Maiden Bermuda therefore now reinsures 40% of the subject workers’ compensation business up to $10,000, subject inuring reinsurance protection that AmTrust has purchased. to certain additional Effective September 1, 2010, the Company through its indirect wholly owned subsidiary, Maiden Specialty, entered into a quota share reinsurance agreement with Technology Insurance Company, Inc. (‘‘Technology’’), a subsidiary of AmTrust. Under the agreement, Maiden Specialty will cede (a) 90% of its gross liability written under the Open Lending Program (‘‘OPL’’) and (b) 100% of its surplus lines general liability business under the Naxos Avondale Specialty Casualty Program (‘‘NAXS’’). Maiden Specialty’s involvement is limited to certain states where Technology is not fully licensed. The agreement also provides that Maiden Specialty receives a ceding commission of 5% of ceded written premiums. The reinsurance agreement had a term of three years and remained continuously in force until terminated in accordance with the contract. The OPL program was terminated on December 31, 2011 on a run-off basis and the NAXS program terminated on October 31, 2012. Maiden Specialty recorded approximately $7,363 of premiums earned ceded and $2,171 ceding commission for the year ended December 31, 2012 (2011 − $10,276 and $3,155, respectively, 2010 − $88 and $26, respectively). the Company, Effective September 1, 2010, through its indirect wholly-owned subsidiary, Maiden US, entered into a reinsurance agreement with Security National Insurance Company (‘‘SNIC’’), a subsidiary of AmTrust. Under the agreement, SNIC will cede 80% of the gross liabilities produced under the Southern General Agency program to Maiden US. The agreement provides SNIC with a 5% commission of ceded written premiums. The agreement has a term of one year and automatically renews annually unless terminated pursuant to the terms of the agreement. Under this agreement, Maiden US recorded approximately $2,145 of premiums earned and $107 commission expense for the year ended December 31, 2012 (2011 − $7 and $0.1, respectively, 2010 − $1 and $0.2, respectively). Collateral provided to AmTrust In order to provide AmTrust’s U.S. insurance subsidiaries with credit for reinsurance on their statutory ﬁnancial statements, AII, as the direct reinsurer of the AmTrust’s insurance subsidiaries, has established trust accounts (‘‘Trust Accounts’’) for their beneﬁt. Maiden Bermuda has agreed to provide appropriate collateral to the Reinsurance Agreement of AII’s obligations to the AmTrust secure its proportional share under subsidiaries to whom AII is required to provide collateral. This collateral may be in the form of (a) assets loaned by Maiden Bermuda to AII for deposit into the Trust Accounts, pursuant to a loan agreement between those parties, (b) assets transferred by Maiden Bermuda for deposit into the Trust Accounts, (c) a letter of credit obtained by Maiden Bermuda and delivered to an AmTrust subsidiary on AII’s behalf (a ‘‘Letter of Credit’’), or (d) premiums withheld by an AmTrust subsidiary at Maiden Bermuda’s request in lieu of remitting such premiums to AII (‘‘Withheld Funds’’). Maiden Bermuda may provide any or a combination of these forms of collateral, provided that the aggregate value thereof equals Maiden Bermuda’s proportionate share of its obligations under the Reinsurance Agreement with AII. The amount of collateral Maiden Bermuda is required to maintain, which is determined quarterly, equals its proportionate share of (a) the amount of ceded paid losses for which AII is responsible to such AmTrust subsidiaries but has not yet paid, (b) the amount of ceded loss reserves (including ceded reserves for claims reported but not resolved and losses incurred but not reported) for which AII is responsible to AmTrust subsidiaries, and (c) the amount of ceded reserves for unearned premiums ceded by AmTrust subsidiaries to AII. F-41 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 11. Related Party Transactions − (continued) Maiden Bermuda satisﬁed its collateral requirements under the Reinsurance Agreement with AII as follows: • • by lending funds in the amount of $167,975 as of December 31, 2012 and 2011 to AII pursuant to a loan agreement entered into between those parties. This loan is carried at cost. Pursuant to the Reinsurance Agreement, AmTrust has agreed to cause AII not to commingle Maiden Bermuda’s assets with AII’s other assets and to cause the AmTrust subsidiaries not to commingle Maiden Bermuda’s assets with the AmTrust subsidiaries’ other assets if an AmTrust subsidiary withdraws those assets. AII has agreed that, if an AmTrust subsidiary returns to AII excess assets withdrawn from a Trust Account, drawn on a Letter of Credit or maintained by such AmTrust subsidiary as Withheld Funds, AII will immediately return to Maiden Bermuda its proportionate share of such excess assets. AII has further agreed that if the aggregate fair market value of the amount of Maiden Bermuda’s assets held in the Trust Account exceeds Maiden Bermuda’s proportionate share of AII’s obligations, or if an AmTrust subsidiary misapplies any such collateral, AII will immediately return to Maiden Bermuda an amount equal to such excess or misapplied collateral, less any amounts AII has paid to Maiden Bermuda. In addition, if an AmTrust subsidiary withdraws Maiden Bermuda’s assets from a Trust Account and maintains those assets on its books as withheld funds, AII has agreed to pay to Maiden Bermuda interest at the rate equivalent to the one-month LIBOR plus 90 basis points per annum computed on the basis of a 360-day year on the loan (except to the extent Maiden Bermuda’s proportionate share of AII’s obligations to that AmTrust subsidiary exceeds the value of the collateral Maiden Bermuda has provided), and net of unpaid fees Maiden Bermuda owes to AII Insurance Management Limited (‘‘AIIM’’) and its share of fees owed to the trustee of the Trust Account. The amount of accrued interest relating to the loan was $0 and $0 as of December 31, 2012 and 2011, respectively; and effective December 1, 2008, the Company entered into a Reinsurer Trust Assets Collateral agreement to provide to AII sufficient collateral to secure its proportional share of AII’s obligations to the the collateral, as of December 31, 2012 was U.S. AmTrust approximately $857,013 (2011 − $461,216) and the accrued interest was $6,967 (2011 − $4,131). (See Note 5(e)). subsidiaries. The amount of Reinsurance Brokerage Agreements Effective July 1, 2007, the Company entered into a reinsurance brokerage agreement with AII Reinsurance Broker Ltd. (‘‘AIIB’’), a subsidiary of AmTrust. Pursuant to the brokerage agreement, AIIB provides brokerage services relating to the Reinsurance Agreement and, beginning on April 1, 2011, the European Hospital Liability Quota Share agreement for a fee equal to 1.25% of the premium assumed from AII. The brokerage fee is payable in consideration of AIIB’s brokerage services. AIIB is not the Company’s exclusive broker. AIIB may, if mutually agreed, also produce reinsurance business for the Company from other ceding companies, and in such cases the Company will negotiate a mutually acceptable commission rate. Following the initial one-year term, the agreement may be terminated upon 30 days written notice by either party. Maiden Bermuda recorded approximately $9,097, $6,977 and $5,564 of reinsurance brokerage expense for the years ended December 31, 2012, 2011 and 2010, respectively, and deferred reinsurance brokerage of $6,299 and $4,891 as of December 31, 2012 and 2011, respectively, as a result of this agreement. The Company paid brokerage fees to AmTrust’s subsidiary, AmTrust North America, of $61, $111 and $83 for the years ended December 31, 2012, 2011 and 2010, respectively, for acting as insurance intermediary in relation to certain insurance placements. F-42 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 11. Related Party Transactions − (continued) Asset Management Agreement Effective July 1, 2007, the Company entered into an asset management agreement with AII Insurance to which AIIM has agreed to provide Management Limited (‘‘AIIM’’), an AmTrust subsidiary, pursuant investment management services to the Company. Pursuant to the asset management agreement, AIIM provides investment management services for a quarterly fee of 0.05% if the average value of the account for the previous calendar quarter is less than or equal to $1 billion and 0.0375% if the average value of the account for the previous calendar quarter is greater than $1 billion. Following the initial one-year term, the agreement may be terminated upon 30 days written notice by either party. The Company recorded approximately $3,697, $3,158 and $2,643 of investment management fees for the years ended December 31, 2012, 2011 and 2010, respectively, as a result of this agreement. Other On March 1, 2011, the Company entered into a time sharing agreement for the lease of aircraft owned by AmTrust Underwriters, Inc. (‘‘AUI’’), a wholly owned subsidiary of AmTrust. The lease is for 10 months ending on December 31, 2012 and automatically renews for successive one-year terms unless terminated in accordance with the provisions of the agreement. Pursuant to the agreement, the Company will reimburse AUI for actual expenses incurred as allowed by Federal Aviation Regulations. For the year ended December 31, 2012, the Company recorded an expense of $38 (2011 − $96) for the use of the aircraft. ACAC The following describes transactions between the Company and ACAC and its subsidiaries: ACAC Quota Share Reinsurance Agreement lines automobile business. The ACAC Quota Share provides that Maiden Bermuda, effective March 1, 2010, reinsures 25% of the net premiums of the GMAC personal lines business, pursuant to a quota share reinsurance agreement (‘‘ACAC Quota Share’’) with the GMAC personal lines insurance companies, as cedents, and Maiden Bermuda, ACP Re Ltd., a Bermuda reinsurer which is a wholly-owned indirect subsidiary of the Annuity Trust, and AmTrust, as reinsurers. Maiden Bermuda has a 50% participation in the ACAC Quota Share, by which it receives 25% of net premiums of the in personal accordance with their participation percentages, shall receive 50% of the net premium of the GMAC personal lines insurance companies and assume 50% of the related net losses. The ACAC Quota Share has an initial term of three years and shall renew automatically for successive three years terms unless terminated by written notice not less than nine months prior to the expiration of the current term. Notwithstanding the foregoing, Maiden Bermuda’s participation in the ACAC Quota Share may be terminated by ACAC on 60 days written notice in the event Maiden Bermuda becomes insolvent, is placed into receivership, its ﬁnancial condition is impaired by 50% of the amount of its surplus at the inception of the ACAC Quota Share or latest anniversary, whichever is greater, is subject to a change of control, or ceases writing new and renewal business. ACAC also may terminate the agreement on nine months written notice following the effective date of initial public offering or private placement of stock by ACAC or a subsidiary. Maiden Bermuda may terminate its participation in the ACAC Quota Share on 60 days written notice in the event ACAC is subject to a change of control, ceases writing new and renewal business, effects a reduction in their net retention without Maiden Bermuda’s consent or fails to remit premium as required by the terms of the ACAC Quota Share. the reinsurers, severally, The ACAC Quota Share provides that the reinsurers pay a provisional ceding commission equal to 32.5% of ceded earned premium, 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 60.0% or less and a minimum of 30.5% if the loss ratio is 64.5% or greater. F-43 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 11. Related Party Transactions − (continued) Effective October 1, 2012, the parties amended the reinsurance agreement to decrease the provisional ceding commission from 32.5% to 32.0% of ceded earned premium, net of premiums ceded by the personal lines companies for to adjustment to a minimum of 30.0% (changed from 30.5%), if the loss ratio is 64.5% or greater. The Company believes that the terms, conditions and pricing of the ACAC Quota Share have been determined by arm’s length negotiations and reﬂect current market terms and conditions. to adjustment. The ceding commission is subject inuring reinsurance, subject Maiden Bermuda recorded approximately $85,296 of ceding commission expense for the year ended December 31, 2012 (2011 − $74,983, 2010 − $37,654) as a result of this transaction. Other Effective September 12, 2012, the Company through its indirect wholly-owned subsidiary, Maiden Re Insurance Services, LLC (‘‘Maiden Re’’), entered into a consulting agreement with Integon Association Management LLC (‘‘Integon’’), a wholly owned subsidiary of ACAC, pursuant to which Maiden Re has agreed to provide to Integon underwriting, and pricing support for a fee of $25 per month, and also a fee of $0.1 for each policy quote evaluation and an additional $0.1 for each policy re-quote evaluation. The initial term of this agreement is for a period of one year, unless terminated earlier by either party. This agreement shall be renewed automatically upon expiration of the initial term for successive one year periods, unless a party delivers written notice of non-renewal to the other party at least 120 days before the end of the initial term or any renewal the year ended December 31, 2012. term. The Company recorded $100 consulting fee income for Maiden Specialty entered into a reinsurance arrangement with New South Insurance Company (‘‘New South’’), a subsidiary of ACAC. Pursuant to the agreement, Maiden Specialty cedes 100% of certain personal lines business to New South. On March 1, 2010, Maiden Specialty entered into a novation agreement with Motors and New South whereby New South replaced Motors as the reinsurer for all of this business. Maiden Specialty recorded approximately $0 and $0 of ceded premium and ceding commissions, respectively, for the year ended December 31, 2012 (2011 − $(0.6) and $0.2, respectively, 2010 − $398 and $61, respectively). In June 2011, the Company, through Maiden NA, issued $107,500 principal amount of 8.25% Senior Notes due on June 15, 2041, which are fully and unconditionally guaranteed by the Company. The 2011 Senior Notes were used to repurchase on a pro rata basis $107,500 of the $260,000 outstanding Trust Preferred Securities. The Company offered all Trust Preferred Securities holders the option to have their securities repurchased on the same terms. ACP Re Ltd., an entity owned by the Annuity Trust controlled by Michael Karfunkel accepted the offer to repurchase its $79,066 in principal amount of Trust Preferred Securities on July 15, 2011. George Karfunkel purchased $25,000, and ACAC and AII each purchased $12,500, of the principal amount of the 2011 Senior Notes. The Company’s Audit Committee reviewed and approved ACAC’s, AII’s, and George Karfunkel’s participation in the 2011 Senior Notes offering. Warrant Exchange Please see Note 14 to the Consolidated Financial Statements. 12. Commitments and Contingencies a) Concentrations of Credit Risk As of December 31, 2012 and 2011, the Company’s assets primarily consisted of investments, cash, loan to related party and reinsurance balances receivable. The Company manages concentration of credit risk in the investment portfolio through issuer and sector exposure limitations. The Company believes it bears minimal credit risk in its cash on deposit. F-44 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 12. Commitments and Contingencies − (continued) The Company also monitors the credit risk related to the loan to related party and its reinsurance balances receivable, within which the largest balances are due from AmTrust, ACAC and Motors. To mitigate credit risk we generally have a contractual right of offset thereby allowing us to settle claims net of any premiums or loan receivable, the Company believes these balances will be fully collectible. b) Concentrations of Revenue During 2012, our gross premiums written for AmTrust and ACAC accounted for 56.8% (2011 − 51.0%, 2010 − 51.9%) of our total gross premiums written. AmTrust accounted for $840,346 or 42.0% (2011 − $669,283 or 36.9%, 2010 − $468,043 or 36.1%) and ACAC accounted for $295,646 or 14.8% (2011 − $256,201 or 14.1%, 2010 − $205,739 or 15.8%). c) Brokers We produce our reinsurance business for our Diversiﬁed Reinsurance segment primarily through brokers. During 2012, three brokers accounted for 49.7% (2011 − 59.7%, 2010 − 56.3%) of our total gross premiums written through brokers for the Diversiﬁed Reinsurance segment. Marsh & McLennan Inc.(including Guy Carpenter) accounted for 24.1% (2011 − 27.4%, 2010 − 31.0%), Aon Benﬁeld Group, Ltd. for 13.5% (2011 − 18.1%, 2010 − 16.9%) and Beach & Associates, Ltd. for 12.1% (2011 − 14.2%, 2010 − 8.4%). d) Letters of Credit As of December 31, 2012 and 2011, we had letters of credit outstanding of $101,411 and $97,486, respectively. The letters of credit are secured by cash and marketable investments of $113,717 (2011 − $109,337). e) Employment agreements The Company has entered into employment agreements with certain individuals. The employment agreements provide for option awards, executive beneﬁts and severance payments under certain circumstances. f) Operating Lease Commitments The Company leases office space, an apartment, equipment and vehicles under operating leases expiring in various years through 2017. Total rent expense for the years ended December 31, 2012, 2011 and 2010 was $2,485, $2,283 and $1,969, respectively. Future minimum lease payments as of December 31, 2012 under non-cancellable operating leases for the next ﬁve years are approximately as follows: 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2012 $2,004 1,646 942 482 482 $5,556 g) Unfunded Commitments The Company has an unfunded commitment on its investment in limited partnerships of approximately $3,099 as of December 31, 2012. h) Loans and Other Collateral Please see Note 11 for the discussion related to loan provided to AmTrust. F-45 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 12. Commitments and Contingencies − (continued) i) Deposit Insurance The Company maintains cash and cash equivalents balances at ﬁnancial institutions in the U.S., Bermuda and other international jurisdictions. In the U.S., the Federal Deposit Insurance Corporation secures account up to $250. In certain other international jurisdictions, there exist similar protections. Management monitors risk to balances in excess of the Company. insured limits and believes they do not represent a signiﬁcant credit j) Legal Proceedings Except as noted below, the Company is not a party to any material legal proceedings. From time to time, the Company is subject to routine legal proceedings, including arbitrations, arising in the ordinary course of the Company in the business. These legal proceedings generally relate to claims asserted by or against the eventual ordinary course of insurance or reinsurance operations. Based on the Company’s opinion, outcome of these legal proceedings is not expected to have a material adverse effect on its ﬁnancial condition or results of operations. In April 2009, the Company learned that Bentzion S. Turin, the former Chief Operating Officer, General Counsel and Secretary of Maiden Holdings and Maiden Bermuda, sent a letter to the U.S. Department of Labor claiming that his employment with the Company was terminated in retaliation for corporate whistle blowing in violation of the whistle blower protection provisions of the Sarbanes-Oxley Act of 2002. Mr. Turin alleged concerns regarding corporate governance with respect to negotiation of the terms of the TRUPS Offering and seeks reinstatement as Chief Operating Officer, General Counsel and Secretary of Maiden Holdings and Maiden Bermuda, back pay and legal fees incurred. The Company believes that it had ample reason for terminating such employment for good and sufficient legal cause, and the Company believes that the claim is without merit and is vigorously defending this claim. On December 31, 2009, the U.S. Secretary in its entirety. of Labor found no reasonable cause for Mr. Turin’s claim and dismissed the complaint Mr. Turin objected to the Secretary’s ﬁndings and requested a hearing before an administrative law judge in the U.S. Department of Labor. The Company moved to dismiss Mr. Turin’s complaint, and its motion was granted by the Administrative Law Judge on June 30, 2011. On July 13, 2011, Mr. Turin ﬁled a petition for the Administrative Law Judge’s decision with the Administrative Review Board in the review of U.S. Department of Labor. The Company ﬁled its brief review on October 19, 2011. in opposition to the petition for k) Dividends declared During the fourth quarter, the Company’s Board of Directors authorized the following quarterly dividends payable to shareholders: Common shares . . . . . . . . . . . . . . . Preference shares − Series A . . . . . . . Dividend per Share $ 0.09 $0.6073 Payable on: December 28, 2012 December 17, 2012 Record date: December 14, 2012 December 1, 2012 On December 4, 2012, the Company announced the acceleration of the common share dividend record date and payment date for the Company’s previously announced quarterly cash dividend of $0.09 per common share. The common share dividend was paid on December 28, 2012 to shareholders of record as of December 14, 2012. Prior to this announcement, the record date and the payment date of the quarterly dividends to common shareholders were January 2, 2013 and January 15, 2013 respectively. F-46 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 13. Earnings per Common Share The following is a summary of the elements used in calculating basic and diluted earnings per common share: For the Year Ended December 31, Net income attributable to Maiden common 2012 2011 2010 shareholders. . . . . . . . . . . . . . . . . . . . . . . . . $ 46,510 $ 28,524 $ 69,866 Weighted average number of common shares outstanding − basic . . . . . . . . . . . . . . . . . . . . . 72,263,022 72,155,503 70,799,966 Potentially dilutive securities: Share options . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of common shares 842,509 748,185 572,722 outstanding − diluted. . . . . . . . . . . . . . . . . . . . 73,105,531 72,903,688 71,372,688 Basic earnings per share attributable to Maiden common shareholders: Diluted earnings per share attributable to Maiden common shareholders: $ $ 0.64 0.64 $ $ 0.40 0.39 $ $ 0.99 0.98 As of December 31, 2012, 2,072,989 share options (2011 − 2,137,836; 2010 − 1,820,626) were excluded from diluted earnings per common share as they were anti-dilutive. 14. Shareholders’ Equity a) Common Shares The following table shows the summary of changes in common shares issued and outstanding: Issued and outstanding shares − January 1 . . . . . . . . Exercise of options . . . . . . . . . . . . . . . . . . . . . . . Exchange of warrants. . . . . . . . . . . . . . . . . . . . . . Issued and outstanding shares − December 31 . . . . . For the Year Ended December 31, 2011 72,107,100 114,328 — 72,221,428 2010 70,291,289 15,811 1,800,000 72,107,100 2012 72,221,428 122,519 — 72,343,947 (i) Authorized and Issued — The Company’s authorized share capital is 150,000,000 common shares with a par value of $0.01 per share, of which there are 72,343.947 common shares issued and outstanding. A total of 7,800,000 common shares were issued to the Founding Shareholders in consideration of their investment of $50,000 in the Company and a further 51,750,000 common shares were sold by the Company in a private placement which raised approximately $479,929 in net proceeds in July 2007. On January 20, 2009, the Company issued an additional 11,700,000 common shares as a result of another private placement which was discussed in more detail under Note 8. A further 122,519, 114,328, and 15,811 common shares were issued in 2012, 2011 and 2010, respectively, relating to the exercise of share options. The holders of our common shares are entitled to receive dividends and are allocated one vote per common share, subject to downward adjustment under certain circumstances. See below for the discussion relating to the exchange of warrants in 2010. F-47 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 14. Shareholders’ Equity − (continued) On December 24, 2012, the Company adopted a written trading plan to facilitate the repurchase of its common shares in accordance with the Company’s existing share purchase reauthorization whereby in August 2012, the Board of Directors approved the repurchase of up to $75 million of the Company’s common shares. During the year ended, December 31, 2012, there was no common shares repurchased by the Company. (ii) Warrants — In connection with the formation by our Founding Shareholders, the Company issued to the Founding Shareholders 10-year warrants to purchase up to 4,050,000 common shares of the Company at $10 per share. The warrants were effective June 14, 2007 and were to expire on June 14, 2017. The warrants were initially measured at an aggregate fair value of $19,521 which was recorded as an addition to additional paid-in-capital with an offsetting charge to additional paid-in-capital as well. The fair value of the warrants issued was estimated on the date of grant using the Black-Scholes option-pricing model. The volatility assumption used, 34.53%, was derived from the historical volatility of the share price of a range of publicly-traded companies with similar types of business to that of the Company. No allowance was made for any potential illiquidity associated with the private trading of the Company’s common shares. The other assumptions in the option pricing model were as follows: risk free interest rate of 5.16%, expected life of 10 years and a dividend yield of 1%. On September 20, 2010, the Company entered into Warrant Exchange Agreements, under which each of the Founding Shareholders agreed to surrender the warrants in exchange for a total of 1,800,000 of the Company’s common shares. These common shares are restricted under Lockup Agreements under which the Founding Shareholders may not sell or transfer the shares awarded without the prior written consent of the Company for a period of 36 months following the exchange. The fair value of the warrants at the time of exchange was $2.06 per warrant or $8,343 while the fair value of the 1,800,000 restricted common shares issued was $4.56 per share or $8,208. The terms of the exchange of the warrants and issuance of the common shares were negotiated and unanimously approved by the Audit and Compensation Committees of the Company’s Board of Directors. In connection with their review, the Committees were advised by independent legal counsel and obtained an independent appraisal of the fair value of the warrants and the restricted common shares. The issuance of the restricted common shares was recorded as an offset to additional paid-in-capital where the warrants were originally recorded. (iii) Treasury Shares — On October 14, 2008, a hedge fund that the Company had invested in decided to close and liquidate its investments and return cash to shareholders in stages over an 18 month period. This hedge fund was also a shareholder in the Company. Maiden agreed to receive its shares from the hedge fund, in lieu of the cash that the Company would have received upon the redemption of 90% of its investment in the fund. As a result of this transaction the Company received 962,336 shares at the valuation price of $3.95 per share. The Company holds these shares as Treasury Shares. b) Preference Shares — Series A On August 22, 2012, the Company issued six million 8.25% Preference Shares-Series A (the ‘‘Preference Shares’’), par value $0.01 per share, at a price of $25 per share. The Company received net proceeds of $145,041 from its offering, after deducting expenses and underwriting discounts of $4,959. The Preference Shares have no stated maturity date and are redeemable in whole or in part at the option of the Company any time after August 29, 2017 at a redemption price of $25 per preference share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Dividends on the Preference Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preference Shares for any dividend period, holders of Preference Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. The holders of Preference Shares will be entitled to receive dividend payments only when, as and if declared by F-48 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 14. Shareholders’ Equity − (continued) the Company’s Board of Directors or a duly authorized committee of the Board of Directors. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.25% of the $25 liquidation preference per annum. During any dividend period, so long as any Preference Shares remain outstanding, unless the full dividends for the latest completed dividend period on all outstanding Preference Shares have been declared and paid, no dividend shall be paid or declared on the common shares. The holders of the Preference Shares have no voting rights other than the right to elect up to two directors if preference share dividends are not declared and paid for six or more dividend periods. For the year ended December 31, 2012, the Company declared and paid $3,644 in preference share dividends. 15. Share Compensation and Pension Plans The Company’s Amended and Restated 2007 Share Incentive Plan (the ‘‘Plan’’), provides for grants of options, restricted common shares and restricted share units. The total number of common shares currently reserved for issuance under the Plan is 10,000,000. The Plan is administered by the Compensation Committee of the Board of Directors. Exercise prices of options will be established at or above the fair market value of the Company’s common shares at the date of grant. Under the Plan, unless otherwise determined by the Compensation Committee and provided in an award agreement, 25% of the options will become exercisable on the ﬁrst anniversary of the grant date, with an additional 6.25% of the options vesting each quarter thereafter based on the grantee’s continued employment over a four-year period, and will expire ten years after grant date. Share Options The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all share option awards on the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The adoption of ASC Topic 718 ‘‘Compensation — Stock Compensation’’ fair value method has resulted in share-based expenses (a component of salaries and beneﬁts) in the amount of approximately $1,347, $1,307 and $1,015 for the years ended December 31, 2012, 2011 and 2010, respectively. The key assumptions used in determining the fair value of options granted in 2012, 2011 and 2010 and a summary of the methodology applied to develop each assumption were as follows: 2012 2011 2010 Assumptions: Volatility . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . Weighted average expected lives in years . . Forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield rate 45.30 − 47.60% 45.55 − 47.60% 29.50 − 46.00% 1.29 − 1.62% 1.62 − 3.21% 5.5 − 6.1 years 6.1 years 0% 0% 1.00 − 3.57% 3.04 − 3.27% 0.85 − 1.29% 6.1 years 1.60% 3.04 − 3.55% F-49 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 15. Share Compensation and Pension Plans − (continued) Expected Price Volatility — This is a measure of the amount by which a price has ﬂuctuated or is expected to ﬂuctuate. It was not possible to use actual experience to estimate the expected volatility of the price of the common shares in estimating the value of the options granted because the Company’s common shares only began trading in May 2008, thus, it does not have enough history over which to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for the Company blended its historical volatility with the historical volatilities of a set of such estimate, comparable companies in the industry in which the Company operates. Risk-Free Interest Rate — This is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense. Expected Lives — This is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simpliﬁed method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period as historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense. Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense. Dividend Yield — This is calculated by dividing the expected annual dividend by the share price of the Company at the valuation date. An increase in the dividend yield will decrease compensation expense. The following schedule shows all options granted, exercised, expired and exchanged under the Plan for the years ended December 31, 2012, 2011 and 2010: Outstanding, December 31, 2009 . . Granted . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . Outstanding, December 31, 2010 . . Granted . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . Outstanding, December 31, 2011 . . Granted . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . Outstanding, December 31, 2012 . . Total options exercisable at December 31, 2012 . . . . . . . . . . Number of Share Options 2,036,542 931,333 (15,811) (688) (10,500) 2,940,876 133,500 (114,328) (375) (43,530) 2,916,143 117,000 (122,519) (103,847) (11,340) 2,795,437 Weighted Average Exercise Price $5.79 $7.57 $3.28 $3.28 $3.28 $6.41 $8.57 $3.69 $7.65 $7.19 $6.61 $8.89 $3.90 $9.87 $7.54 $6.70 Weighted Average Remaining Contractual Term 8.86 years 9.60 years Fair Value of Options $2.45 Aggregate Intrinsic Value $1,548 $ 68 Range of Exercise Prices $3.28 − 10.00 $6.94 − 7.99 $2.89 8.40 years 9.77 years $2.65 7.55 years 9.65 years $5,286 $ 587 $6,866 $ 616 $3.28 − 10.00 $7.63 − 9.40 $3.28 − 10.00 $8.14 − 9.42 6.75 years $7,271 $3.28 − 10.00 2,127,141 $6.35 6.35 years $6,336 $3.28 − 10.00 F-50 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 15. Share Compensation and Pension Plans − (continued) The weighted average grant date fair value was $2.05, $2.01 and $1.91 for all options outstanding at December 31, 2012, 2011 and 2010, respectively. There was approximately $1,528 of total unrecognized compensation cost related to non-vested share-based compensation arrangements as of December 31, 2012 which will be recognized during the next 4 years. Cash in the amount of $478 was received from employees as a result of employee share option exercises during the year ended December 31, 2012 (2011 − $422; 2010 − $52). The Company issues new common shares upon the exercise of an option. In connection with these exercises, there was no tax beneﬁt realized by the Company. Performance-Based Restricted Share Units (PB-RSUs) The Compensation Committee of the Board of Directors approved the formation of a long-term incentive program under the Plan on March 1, 2011. On that date, the Committee determined to award PB-RSUs to executive officers and senior Company employees. The formula for determining the amount of PB-RSUs awarded uses a combination of a percentage of the employee’s base salary (based on a benchmarking analysis from the Company’s compensation consultant) divided by the closing price on NASDAQ Global Select Market of our common shares on that date. The grants are performance based which require that certain criteria such as return on equity, underwriting performance, revenue growth and operating expense be met during the performance period to attain a payout. Each metric has a corresponding weighted percentage with a target, threshold and maximum level of performance goal set to achieve a payout. Settlement of the grants can be made in either common shares or cash upon the decision of the Compensation Committee of the Company. The ﬁrst performance cycle is for two years, 2011 − 2012, and subsequent performance cycles will be for three years. For the years ended December 31, 2012 and 2011, no accrual was recognized as the calculated weighted percentage of the performance results of the Company did not meet the target level. CEO Non-Performance-Based Restricted Share Units On March 1, 2012, the Compensation Committee of the Board of Directors approved an award of non-performance-based restricted share units to the Company’s CEO. The award consists of 86,705 restricted share units, of which one-third automatically vest by December 31, 2012, of which one-third automatically vest by December 31, 2013, and of which one-third automatically vest by December 31, 2014. Each share unit has a fair value of $8.56 which is amortized over 34 months. The unamortized compensation cost related to this grant is $524 as of December 31, 2012. Pension Plans The Company provides pension beneﬁts to eligible employees principally through various deﬁned contribution plans sponsored by the Company which vary for each subsidiary. The Company’s expenses for its deﬁned contribution plans were $2,529, $2,813 and $2,326 for the years ended December 31, 2012, 2011 and 2010, respectively. 16. Taxation Under current Bermuda law, Maiden Holdings and Maiden Bermuda, have received an undertaking from the Bermuda government exempting them from all local income, withholding and capital gains taxes until March 31, 2035. At the present time, no such taxes are levied in Bermuda. Maiden Holdings and Maiden Bermuda believe that they operate in a manner such that they will not be considered to be engaged in a trade or business in the U.S. Accordingly, Maiden Holdings and Maiden Bermuda have not recorded any provision for U.S. taxation. Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes income taxes has been determined under the applicable to U.S. corporations. The provision for federal principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulations. Should the F-51 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 16. Taxation − (continued) U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Our U.S. subsidiaries were under examination for tax years 2009 and 2010. The audits have been closed. There was no impact on the ﬁnancial statements as a result. Subsequent tax years are not under examination but remain subject to examination in the U.S. The Company has subsidiary operations in various other jurisdictions around the world, including but not limited to Australia, Austria, Germany, Netherlands, Russia and the U.K., that are subject to relevant taxes in those jurisdictions. Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries as it is the intention that such earnings will remain reinvested or will not be taxable. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding taxation in the country of the paying entity. Currently however, no withholding taxes have been accrued. There were no unrecognized tax beneﬁts at December 31, 2012, 2011 and 2010. Income tax expense for the years ended December 31, 2012, 2011 and 2010 and net deferred tax liabilities for the years ended December 31, 2012 and 2011 were as follows: For the Year Ended December 31, Current tax expense − U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . Current tax expense − Other jurisdictions . . . . . . . . . . . . . . . . . Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax expense − U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax expense − Other jurisdictions. . . . . . . . . . . . . . . . . Total deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $ 34 986 1,020 1,161 32 1,193 $2,213 2011 $ 79 553 632 1,161 134 1,295 $1,927 2010 $ 130 30 160 1,170 — 1,170 $1,330 The following table is a reconciliation of the actual income tax rate for the years ended December 31, 2012, 2011 and 2010 to the amount computed by applying the effective tax rate of 0.0% under Bermuda law to income before taxes: For the Year Ended December 31, Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 $52,474 2,213 $50,261 2011 $30,454 1,927 $28,527 2010 $71,192 1,330 $69,862 Reconciliation of effective tax rate (% of income before taxes) Bermuda tax rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. taxes at statutory rates. . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance in respect of U.S. taxes . . . . . . . . . . . . . . . Other jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —% —% —% (9.4)% (67.2)% (18.8)% 20.6% 71.3% 11.7% 0.1% 2.2% 1.9% 1.9% 6.3% 4.2% F-52 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 16. Taxation − (continued) Deferred income taxes reﬂect the tax impact of temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting and income tax purposes. The signiﬁcant components of our deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows: December 31, Deferred tax assets: Net operating losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounting of net loss and loss adjustment expense reserves . . . . . . . . . . Accruals not currently deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets before valuation allowance. . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Deferred commission and other acquisition expenses. . . . . . . . . . . . . . . . Indeﬁnite lived intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Market discount on bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 $42,014 8,929 10,585 88 2,988 913 65,517 41,231 24,286 13,054 2,870 4,837 10,249 488 488 31,986 $ 7,700 $38,279 5,595 5,212 1,647 2,680 343 53,756 36,208 17,548 7,829 2,870 3,676 9,111 497 24 24,007 $ 6,459 The net deferred tax liability at December 31, 2012 is $7,700. A valuation allowance has been established against the net U.S. deferred tax assets which is primarily attributable to net operating losses, unearned premium and loss reserve discounting. At this time, we believe it is necessary to establish a valuation allowance against the net deferred tax assets due to insufficient positive evidence regarding the utilization of these losses. During 2012, the Company recorded an increase in the valuation allowance of $6,104 (2011 − $21,713) which was recorded in the Consolidated Statements of Income and a decrease of $1,081 (2011 − increase of $1,545) was recorded as a component of other comprehensive income in shareholders’ equity. At December 31, 2012, the Company has available U.S. net operating loss carry-forward of approximately $119,991 for income tax purposes which will expire beginning in 2029. 17. Statutory Financial Information Under The Insurance Act 1978 (Bermuda), amendments thereto and related regulations (the ‘‘Insurance Act’’), Maiden Bermuda is required to prepare Statutory Financial Statements and to ﬁle a Statutory Financial Return in Bermuda. The Insurance Act also requires Maiden Bermuda to maintain a minimum share capital of $120. To satisfy these requirements, the statutory capital and surplus of Maiden Bermuda at December 31, 2012 was approximately $942,806 (2011 − $693,435) and the amount required to be maintained under Bermuda law, the Minimum Solvency Margin, was $231,133 (2011 − $226,468) at December 31, 2012. Maiden Bermuda was also required to maintain a minimum liquidity ratio. All requirements were met by Maiden Bermuda throughout the period. In addition, Maiden Bermuda is subject to statutory and regulatory restrictions under the Insurance Act 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 F-53 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 17. Statutory Financial Information − (continued) payment (and in certain cases prior approval of the Bermuda Monetary Authority). Maiden Bermuda is also restricted in paying 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’’). Maiden Bermuda is currently completing its BSCR as of December 31, 2012 and it is anticipated Maiden Bermuda will be allowed to pay dividends or distributions not exceeding $217,652. Maiden Bermuda is registered as a Class 3B reinsurer under the Insurance Act and therefore must maintain capital at a level equal to its ECR which is established by reference to the BSCR model. The BSCR employs a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The regulatory requirements are designed to have insurers operate at or above a threshold capital level, which exceeds the BSCR. While not speciﬁcally referred to in the Insurance Act, the BMA has established a target capital level (‘‘TCL’’) for each Class 3B insurer equal to 120% of its ECR. While a Class 3B insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. Maiden Bermuda is currently completing its BSCR as of December 31, 2012 and believes that it exceeds the ECR level of required capital. For Bermuda registered insurance companies, there are some differences between ﬁnancial statements prepared in accordance with U.S. GAAP and those prepared on a statutory basis. Certain assets are non-admitted under Bermuda regulations and so deferred commission and other acquisition expenses have been fully expensed and prepaid expenses and ﬁxed assets removed from the statutory balance sheet. The Company’s insurance subsidiaries in the U.S., Maiden US and Maiden Specialty, ﬁle ﬁnancial statements in accordance with statutory accounting practices (‘‘SAP’’) prescribed or permitted by domestic or foreign insurance regulatory authorities. The differences between statutory ﬁnancial statements and ﬁnancial statements prepared in accordance with GAAP vary between domestic and foreign jurisdictions. The principal differences relate to (1) acquisition expenses incurred in connection with acquiring new business which are charged to expense under SAP but under GAAP are deferred and amortized as the related premiums are earned; (2) limitation on net deferred tax assets created by the tax effects of temporary differences; (3) unpaid losses and loss expense, and unearned premium reserves are presented gross of reinsurance with a corresponding asset recorded; and (4) ﬁxed maturity portfolios that qualify as available-for-sale are carried at fair value and changes in fair value are reﬂected directly in unassigned surplus, net of related deferred taxes. Without prior approval of its domiciliary commissioner, dividends to shareholders are limited by the laws of the US companies’ state of domicile, Missouri and North Carolina, to the greater of 10% of statutory policyholders’ surplus as of the preceding December 31, or net income, less net realized capital gain on investments, for the 12-month period ending December 31 of the preceding year. Accordingly, the maximum dividend payments that can be made in the next year without prior approval by the Missouri Department of Insurance and North Carolina Department of Insurance is $0 and $4,616, respectively. insurance The Company’s regulated by the Swedish subsidiary in Sweden, Maiden LF, Finansinspektionen (‘‘Swedish FSA’’). Maiden LF was required to maintain a minimum level of statutory capital and surplus of $4,618 at December 31, 2012 (2011 − $4,536). This requirement was met by Maiden LF throughout the period. The statutory assets were approximately $29,378 (2011 − $31,761). Maiden LF is subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF to the Company. As of December 31, 2012, Maiden LF is allowed to pay dividends or distributions not exceeding the capital surplus of $2,007. is F-54 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 17. Statutory Financial Information − (continued) The Statutory equity and net income of the Company’s insurance and reinsurance subsidiaries were as follows: Statutory Capital and Surplus December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory Net Income (Loss) For the Year Ended December 31, 2012 . . . . . . . . . . . . For the Year Ended December 31, 2011 . . . . . . . . . . . . For the Year Ended December 31, 2010 . . . . . . . . . . . . 18. Subsequent Events Maiden Bermuda Maiden US Maiden Specialty Maiden LF $942,806 693,435 $267,863 268,055 $46,164 36,280 $8,603 7,866 $ 79,113 30,070 89,562 $ (19,156) (1,684) 1,268 $ 1,227 119 1,675 $ 464 753 486 On February 19, 2013, the Company’s Board of Directors authorized the following quarterly dividends: Common shares . . . . . . . . . . . . . . . . . . . Preference shares − Series A. . . . . . . . . . . Dividend per Share $ 0.09 $0.515625 Payable on: April 15, 2013 March 15, 2013 Record date: April 1, 2013 March 1, 2013 On March 7, 2013, Maiden Bermuda and AII executed an amendment to the Reinsurance Agreement, which provides for the extension of the term of the Quota Share to July 1, 2016. The amendment further provides that, effective January 1, 2013, AII will receive a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission will remain 34.375%. Lastly, with regards to the Specialty Program portion of Covered Business only, excluding workers’ compensation business included in the AmTrust’s Specialty Program segment from July 1, 2007 through December 31, 2012, AmTrust will be responsible for ultimate net loss otherwise recoverable from Maiden Bermuda to the extent that the loss ratio to Maiden Bermuda, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95%. Above and below the deﬁned corridor, the Company will continue to reinsure losses at its proportional 40% share per the Reinsurance Agreement. F-55 MAIDEN HOLDINGS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) 19. Condensed Quarterly Financial Data — Unaudited The following tables summarize our quarterly ﬁnancial data: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) attributable to Maiden common Mar 31 $463,052 20,378 2012 Quarters Ended Sep 30 Jun 30 $475,555 $456,536 21,934 14,606 Dec 31 $504,622 (6,657) shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,377 14,541 21,919 (10,327) Comprehensive income (loss) − attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings (loss) per common share attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . . . Diluted earnings (loss) per common share attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . 47,167 19,250 63,802 (2,994) $ $ 0.28 0.28 $ $ 0.20 0.20 $ $ 0.30 0.30 $ $ (0.14) (0.14) Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) attributable to Maiden common Mar 31 $370,378 19,345 2011 Quarters Ended Sep 30 Jun 30 $440,656 $390,371 16,002 (24,372) Dec 31 $439,035 17,552 shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,342 (24,366) 16,004 17,544 Comprehensive income (loss) − attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings (loss) per common share attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . . . Diluted earnings (loss) per common share attributable to Maiden shareholders . . . . . . . . . . . . . . . . . . . . 24,212 (5,722) 12,918 6,841 $ $ 0.27 0.27 $ $ (0.34) (0.34) $ $ 0.22 0.22 $ $ 0.25 0.24 F-56 MAIDEN HOLDINGS, LTD. SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES (in thousands of U.S. dollars) December 31, 2012 Available-for-sale securities: Amortized Cost* Fair Value U.S. treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency bonds − mortgage-backed . . . . . . . . . . . . . . . . . U.S. agency bonds − other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. government bonds Other mortgage-backed bonds . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale ﬁxed maturities . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,671 962,649 11,682 55,169 23,167 1,247,260 132,604 2,475,202 2,599 $2,477,801 $ 43,931 992,174 13,089 57,433 24,068 1,354,154 133,848 2,618,697 2,901 $2,621,598 Schedule I Amount at Which Shown in the Balance Sheet $ 43,931 992,174 13,089 57,433 24,068 1,354,154 133,848 2,618,697 2,901 $2,621,598 * Original cost of other investments and, for ﬁxed maturities, original cost reduced by repayments and adjusted for amortization of premiums or discounts S-1 Schedule II MAIDEN HOLDINGS, LTD. CONDENSED BALANCE SHEETS — PARENT COMPANY As of December 31, 2012 and 2011 (In thousands of U.S. dollars, except share and per share data) Assets: Fixed maturities, available-for-sale, at fair value (Amortized cost: $103,049) . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances due from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities: Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances due to subsidiaries Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity Preference shares − Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares ($0.01 par value; 73,306,283 and 73,183,764 shares issued in 2012 and 2011, respectively; 72,343,947 and 72,221,428 shares outstanding in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares, at cost (2012 and 2011: 962,336 shares) . . . . . . . . . . . . . . . . Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . 2012 2011 $ 103,651 3,147 1,213,865 55,370 1,063 $1,377,096 $ — 550 983,816 137,733 233 $1,122,332 $ 1,138 360,719 361,857 $ 8,495 345,195 353,690 150,000 — 733 575,869 141,130 151,308 (3,801) 1,015,239 $1,377,096 732 579,004 64,059 128,648 (3,801) 768,642 $1,122,332 S-2 MAIDEN HOLDINGS, LTD. CONDENSED STATEMENTS OF INCOME — PARENT COMPANY For the Years Ended December 31, 2012, 2011 and 2010 (In thousands of U.S. dollars) Schedule II For the Year Ended December 31, 2011 2010 2012 Revenues: Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized and unrealized gains on investments Expenses: General and administrative expenses . . . . . . . . . . . . . . . . . . Foreign exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . Loss before equity in earnings of consolidated subsidiaries . . . . Equity in earnings of consolidated subsidiaries . . . . . . . . . . . . . Net income attributable to Maiden shareholders . . . . . . . . . . Dividends on preference shares . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Maiden common shareholders . . . $ 795 229 1,024 8,030 (225) 7,805 (6,781) 56,935 50,154 (3,644) $46,510 $ 408 — 408 10,806 31 10,837 (10,429) 38,953 28,524 — $ 28,524 $ (118) — (118) 7,076 — 7,076 (7,194) 77,060 69,866 — $69,866 S-3 Schedule II MAIDEN HOLDINGS, LTD. CONDENSED STATEMENTS OF CASH FLOWS — PARENT COMPANY For the Years Ended December 31, 2012, 2011 and 2010 (In thousands of U.S. dollars) Cash ﬂows provided by operating activities: Net income attributable to Maiden shareholders . . . . . . . . . . . . . $ 50,154 $ 28,524 $ 69,866 2012 2011 2010 Adjustments to reconcile net income to cash provided by operating activities: Equity in earnings of consolidated subsidiaries . . . . . . . . . . . . Amortization of bond premium and discount . . . . . . . . . . . . . . Net realized and unrealized gains on investments . . . . . . . . . . . Foreign exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . . Non-cash share compensation expense . . . . . . . . . . . . . . . . . . (56,935) 786 (229) (225) 1,347 (38,953) — — 31 1,307 (77,060) — — — 1,015 Changes in assets − decrease (increase): Balance due from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,588 (829) (36,414) 230 (4,209) (57) Changes in liabilities − (decrease) increase: Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . Balances due to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities (1,579) 15,524 90,602 1,746 63,633 20,104 Cash ﬂows used in investing activities: Purchases of ﬁxed-maturity securities − available-for-sale . . . . . Proceeds from sales of ﬁxed-maturity securities − available-for-sale . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities and calls of ﬁxed maturity securities . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by investing activities . . . . . . . . (137,486) 9,452 24,427 (96,643) (200,250) — — — 148 148 387 36,485 26,427 — — — (7,476) (7,476) Cash ﬂows used in ﬁnancing activities: Preference shares − Series A issuance, net of issuance costs . . . . Dividends paid on preference shares . . . . . . . . . . . . . . . . . . . Dividends paid to Maiden common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common shares Net cash provided by (used in) ﬁnancing activities . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . 145,041 (3,644) (29,630) 478 112,245 2,597 550 3,147 $ — — (20,921) 422 (20,499) (247) 797 550 $ — — (18,394) 52 (18,342) 609 188 797 $ S-4 MAIDEN HOLDINGS, LTD. SUPPLEMENTARY INSURANCE INFORMATION (In thousands of U.S. dollars) December 31, 2012 For the Year Ended December 31, 2012 Schedule III Deferred commission and other acquisition expenses Reserve for loss and loss adjustment expenses Unearned premiums Net premiums earned Net investment income Net loss and loss adjustment expenses Diversiﬁed Reinsurance . . $ 83,287 $1,139,179 $324,954 $ 795,341 $ — $ 583,970 AmTrust Quota Share Amortization of deferred commission and other acquisition expenses $203,209 General and administrative expenses $40,951 Net premiums written $ 765,293 Reinsurance . . . . . . . . ACAC Quota Share . . . . Corporate . . . . . . . . . . . Total — — — 81,188 . . . . . . . . . . . . . . $270,669 $1,740,281 $936,497 $1,803,780 $81,188 521,924 79,178 — 153,530 33,852 — 727,781 280,658 503,915 107,628 494,633 183,745 — $1,262,348 200,546 88,276 — $492,031 1,949 737 10,167 $53,804 840,346 295,646 — $1,901,285 December 31, 2011 For the Year Ended December 31, 2011 Deferred commission and other acquisition expenses Reserve for loss and loss adjustment expenses Unearned premiums Net premiums earned Net investment income Net loss and loss adjustment expenses Diversiﬁed Reinsurance . . $ 98,712 $1,011,431 $348,131 $ 748,387 $ — $ 502,375 AmTrust Quota Share Amortization of deferred commission and other acquisition expenses $200,239 General and administrative expenses $36,374 Net premiums written $ 798,037 Reinsurance . . . . . . . . ACAC Quota Share . . . . Corporate . . . . . . . . . . . Total — — — 74,891 . . . . . . . . . . . . . . $248,436 $1,398,438 $832,047 $1,552,428 $74,891 391,275 92,641 — 327,101 59,906 — 120,369 29,355 — 558,197 245,844 380,263 160,416 — $1,043,054 160,522 78,051 — $438,812 2,283 1,635 13,600 $53,892 669,283 256,201 — $1,723,521 December 31, 2010 For the Year Ended December 31, 2010 Net loss and loss adjustment expenses Diversiﬁed Reinsurance . . $ 85,252 $ 971,317 $291,148 $ 601,254 $ — $394,604 AmTrust Quota Share Reserve for loss and loss adjustment expenses Net investment income Net premiums earned Unearned premiums Deferred commission and other acquisition expenses Amortization of deferred commission and other acquisition expenses $152,698 General and administrative expenses $26,123 Net premiums written $ 554,049 Reinsurance . . . . . . . . ACAC Quota Share . . . . Corporate . . . . . . . . . . . Total — — — 71,651 . . . . . . . . . . . . . . $203,631 $1,226,773 $657,556 $1,169,790 $71,651 284,124 82,284 — 222,812 32,644 — 92,155 26,224 — 445,081 123,455 280,890 79,628 — $755,122 144,655 39,344 — $336,697 1,500 243 14,314 $42,180 468,043 205,739 — $1,227,831 S-5 Schedule IV MAIDEN HOLDINGS, LTD. SUPPLEMENTARY REINSURANCE INFORMATION (In thousands of U.S. dollars) For the Year Ended December 31, 2012 Premiums − General Insurance . . . . 2011 Premiums − General Insurance . . . . 2010 Premiums − General Insurance . . . . (a) Gross $122,412 114,036 71,625 (b) Ceded to other companies $99,707 89,076 70,224 (c) Assumed from other companies $1,878,580 1,698,561 1,226,430 (d) Net amount (a) − (b)+(c) $1,901,285 1,723,521 1,227,831 Percentage of amount to net (c)/(d) 98.8% 98.6% 99.9% S-6 MAIDEN HOLDINGS, LTD. SUPPLEMENTARY INSURANCE INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (In thousands of U.S. dollars) For the Year Ended December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current Year $1,239,016 1,028,855 787,967 Prior Year $ 23,332 14,199 (32,845) Net loss and loss adjustment expenses Schedule VI Paid loss and loss adjustment expenses $1,015,309 880,004 631,334 S-7 Corpor ate Information Board of Directors & Executive Corpor ate Headquarters Form 10-K /Investor Contact Officers Patrick J. Haveron Executive Vice President Ronald M. Judd President of Maiden Global Holdings, Ltd. Maiden Holdings, Ltd. Maiden House 131 Front Street, 2nd Floor Hamilton HM 12 Bermuda Phone: 441 298 4900 A copy of the Maiden Holdings, Ltd. 2012 Annual Report on Form 10-K as filed with the Securities and Exchange Com mis- sion is available on the Company’s web- site at www.maiden.bm. It is also available from the Company at no charge. These requests and other investor contacts should be directed to Investor Relations at the Company’s corporate office. The Company’s principal operating sub- sidiaries are located in Bermuda, the United States and the United Kingdom. Common Stock The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “MHLD.” Annual Meeting May 7, 2013 Hamilton, Bermuda Tr ansfer Agent and Registr ar Independent Auditors American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 800 937 5449 or 718 921 8200 BDO USA, LLP New York, NY Simcha G. Lyons Director John M. Marshaleck Chief Financial Officer Lawrence F. Metz, Esq. Senior Vice President, General Counsel and Secretary Raymond M. Neff Director Yehuda L. Neuberger Director Steven H. Nigro Director Arturo M. Raschbaum President and Chief Executive Officer Karen L. Schmitt President of Maiden Reinsurance Company Barry D. Zyskind Chairman of the Board of Directors Reconciliation to U.S. GA AP Reconciliation of net income attributable to Maiden to income from operations: Net income attributable to Maiden Add (subtract) Foreign exchange (gains) losses Amortization of intangible assets Interest and amortization expenses Accelerated amortization of junior subordinated debt discount and issuance cost Junior subordinated debt repurchase expense Income tax expense Income from operations Investable assets: Total investments Cash and cash equivalents Restricted cash and cash equivalents Loan to related party Funds withheld (1) Total investable assets 1) Comprised of fixed maturity securities, and cash and cash equivalents included in the funds withheld. For the Year ended December 31, 2012 2011 2010 $ 50 in $ millions $ 29 $ 70 (2) 5 37 2–0— — 2 — 5 34 20 15 2 1) 6 36 — — 1 $ 92 $ 105 $ 114 As at December 31, 2012 2011 2010 in $ millions $ 2,622 82 132 168 26 $ 2,023 188 115 168 30 $ 1,880 96 90 168 119 $ 3,030 $ 2,524 $ 2,353 Maiden House 131 Front Street, 2nd Floor Hamilton HM 12 Bermuda P: 441 298 4900 F: 441 292 0471 maiden.bm

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