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Maiden Holdings, Ltd. (NASDAQ:MHLD)

Q3 2008 Earnings Call

November 12, 2008 2:00 pm ET

Executives

Ben Turin – Chief Operating Officer, General Counsel & Secretary

Art Rushbaum – Chief Executive Officer

Michael John Tait – Chief Financial Officer

John Marshaleck – President of Maiden

Barry D. Zyskind – Non-Executive Chairman of the Board

Analysts

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Dan Schlemmer – Fox-Pitt Kelton

Kenneth Billingsley – Signal Hill Group, LLC

Operator

Welcome to the Maiden Holdings, Limited, third quarter 2008 earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference over to Mr. Ben Turin, Chief Operating Officer of Maiden Holdings. Please go ahead sir.

Ben Turin

Before I introduce you to our President and Chief Executive Officer, Mr. R. Rushbaum, our Chief Financial Officer, Mr. Michael Tait, John Marshaleck, President of Maiden Re and our Chairman, Mr. Barry Zyskind, I would like to read a paragraph on forward-looking statements.

This call contains forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company.

There can be no assurance that actual developments will be those anticipated by the company. Actual results may differ materially from those projected as a result of significant risks and uncertainties including non-receipted expected payments, changes in interest rates, effective performance of financial market by investment income and fair values of investments, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the impact of competition pricing environment, changes in demand for the company’s products, the effect of general economic conditions, adverse state and federal legislation, regulations and regulatory investigations into industry practices, developments relating to existing agreements, heightened competition, changing in pricing environments and changes in asset valuations.

The company undertakes no obligation to publically update any forward-looking statements. I would also like to remind you that the presentation relating to the second part of today’s conference call relating to the merger is available at www.ir.maidens.bm. At this point, I would like to introduce you to Maiden’s Chairman, Mr. Barry D. Zyskind.

Barry D. Zyskind

I am pleased to report that Maiden’s operating activities continue to perform well and the company had third quarter operating earnings of $15 million. Net written premium for the third quarter of 2008 was $113 million and earned premiums were $113 million. The combined ratio for the quarter was 94.7%, an analyzed return on operating earnings was 11.7%. I would like to take a moment and discuss the company’s investment impairments.

As discussed in the press release, Maiden had a realized investment loss of $42.5 million, primarily related to fixed income investments of Lehman Brothers and Washington Mutual. These investments were made in 2007 at a time when these companies had very strong ratings in market capitalizations in excess of $40 billion. They were two highly rated financial institutions that suffered as they were overtaken by circumstances.

We believe that the rest of our investments are strong and as previously mentioned the company has no subprime mortgages and no preferred stock from Fannie and Freddie. Although, we are not happy with these impairments, we are pleased with the strength of our core operations.

During the third quarter the company continued to see profitable underwriting and a growth in return and operating equity. Shareholders’ equity as of September 30th was $478 million. The company keeps it fixed maturities available for sale and has unrealized losses impacting shareholders’ equity of $60 million. Having said that Maiden’s balance sheet cash and liquidity are strong and we belief the unrealized losses as temporary.

We have the ability to hold the fixed incomes of investments to maturity and therefore we believe we will see an increase in our book value going forward as positions mature and the markets recover. Following the recent acquisition of GMAC RE our assets have increased to over $1.7 billion. The company has over $400 million in cash and short term investments. Over $960 million or 78% of our fixed maturities are AAA US government or agencies. Of the $270 million in corporate fixed maturities, over 93% is A rated or better.

This further enhances the company’s ability to hold fixed income investments to maturity as we hold such a significant amount of cash and highly rated securities. Regarding our very important recent acquisition, that acquisition of GMAC RE is very exciting for Maiden and we believe we will fast forward our growth as a specialty non-cap insurance company.

Combining the GMAC RE book of business with Maiden’s existing books and AmTrust quarter share will propel Maiden to achieving ROE in excess of 15% with great stability.

With the acquisition we believe that Maiden will be one of the only, and maybe the only, billion dollar offshore specialty reinsurance investment company focused on non-cap lines of business with a healthy strong balance sheet and no equity investments in our portfolio and, of course, highly profitable and predictable. I would now like to turn it over to Maiden’s Chief Financial Officer, Michael John Tait, to discuss the third quarter results in greater depth.

Michael John Tait

I would like to walk you through the key components of results. As mentioned by Barry, our net premium for the third quarter was $113.2 million continuing the strong underlying growth from the first six months. Our net written premium for the first nine months of 2008 totaled $386.9 million. The overall combined ratio for the third quarter 2009 was 94.7% slightly more than the combined ratio for the first nine months of 93.4%.

Our net operating income for the quarter was $15 million and for the first nine months it was $41.2 million. Operating earnings per share were $0.25 for the third quarter 2008 compared to $0.19 for the third quarter of 2007. For the nine months ended September 30, 2008 operating earnings were $0.69 compared to $0.25 in 2007. As you will recall the quarter share contract with AmTrust commenced on July 1, 2007.

After taking account of the realized investment losses relating to the other than temporary impairments in Lehman Brothers, Washington Mutual and other investments of approximately $42.5 million, we had a net loss for the third quarter 2008 of $27.5 million or $0.46 per share. For the nine months the loss was $1.2 million or $0.02 per share.

We operate two segments, AmTrust quarter share and other reinsurance. $102.6 million or 91% of our net premium written for our third quarter 2008 was from the AmTrust quarter share. For the nine months $353.7 million or 91% was from the AmTrust quarter share. In 2007 100% of our premium was from the AmTrust quarter share as we did not commence the other reinsurance segment until the fourth quarter.

The combined ratio for the AmTrust quarter share segment was 93.1% for the third quarter 2008. For the other reinsurance segment, the combined ratio was 112.9%. This segment will become much more substantial with the GMAC RE acquisition and better economies of scale will be achieved and the combined ratio will decline in the following quarters.

Net investment income for the third quarter was $9 million and our average invested assets including the loan to related party were $687.9 million in the third quarter 2008. We have, as Barry mentioned a high quality investment portfolio. Over 98% of our portfolio is in cash and cash equivalents or bonds, 60.5% of our bond portfolio is AAA rated government agencies, 93.7% is A rated or better.

We continue to strongly believe that maintaining a high quality investment portfolio will best serve Maiden’s long term activities. The company’s book value at September 30, 2008 was $8.03 per share. The book value is $8.16 after taking account of the receipt in the fourth quarter of 962,336 shares of the company in lieu of a distribution of an investment in a hedge fund at valuation of $3.95 per share.

I would now like to turn it back to our Chairman of the Board Barry Zyskind.

Barry D. Zyskind

If everyone will take a minute to go to the slide show that we put on our website I’d like to just take a minute to go through the first slide which is page 2. Actually, just go to page 1 again to remind everyone about the forward-looking statement and take a minute to read it. On page 2, as many of you may know we announced recently developments, we have recently acquired GMAC RE the reinsurance business of GMAC Insurance.

We think this is an excellent acquisition for Maiden. As I mentioned previously, fast forwards our business plan and really turns us in to a billion plus specialty non-cap reinsurer. Some of the highlights of the acquisition that I’d like to point out; we paid $100 million for this book of business which if you saw from the press release we said had a pre-tax last year of $65 million. We believe this year the contribution from that business in ’09 will be in excess of $75 million which is very significant and we think very, very highly accretive and a very, very strong transaction.

We also assumed $1 billion potentially of liability, $750 million which were reserves and around $200 million of unearned premiums. We started immediately earning that premium and making money off that investment income when we closed the transaction last week. In addition, we are writing the business, even though we are closing off some shelves, we are writing the business through Motors Insurance company and reinsuring it. So, we have closed the transaction, we’re writing the business and we’re earning the premium and we’re making investment income.

We think this is a great acquisition, we think it’s very accretive, we think it was only available to us because of what is going on in the financial markets and in a normal environment this thing would have been much more expensive and traded at a much higher valuation. More importantly, we are very excited about the new management we have gained with the acquisition.

As you may have seen from the press release we have recently issued last night we have hired Art Raschbaum, formerly CEO of GMAC RE and GMAC Insurance to be the CEO of Maiden Holdings. Art has a long history of building successful insurance companies focusing on disciplined growth and putting together a great team. Now, with that I’d like to turn it over to Art Raschbaum to continue with the presentation.

Art Rushbaum

It’s a pleasure speaking with all of you today. I’m very excited to be with you today. As Barry said I’ve joined as CEO and while I’ve been president of the entire GMAC insurance group most recently for the majority of my career I spent my time really working with the team at GMAC RE and building the business.

I want to today provide you with a summary of the GMAC RE business and the rational that supports Maiden’s acquisition and I’m speaking from a bias position but I strongly believe that Maiden has acquired an extremely strong platform, a great platform well positioned for growth in the future. To say that the recently completed transaction between Maiden Holdings and GMAC Insurance represents a highly complementary transaction in my view is an understatement and a fairly significant one.

To begin with, Maiden will acquire an excellent portfolio of in force business along with ongoing renewal rights as Barry referenced. For 2008 we’re estimating roughly $550 million in gross revenue from the GMAC RE portfolio. The business has generated strong profitability over time and a growth rate over the last five year time frame of over 10% per annum which is significantly greater than the sector growth rate.

That portfolio today represents relationships with over 70 property and casualty clients and of those clients the vast majority of them are regional and specialty ensures in the US. Despite the good high growth rates that we have we do believe that some of the headline risk that has affected our parent and our grandparent historically has certainly impacted our ability to grow the business even more significantly.

With a strong and growing balance sheet we’re very confident that the business will be well positioned for continued growth in the future. Within the portfolio, our reinsurance programs they focus on the more predictable elements of our client company’s reinsurance program. For that targeted client base these programs represent a significant portion of the client’s balance sheet.

Our target participation per account is 50% or greater. With a significant number of active accounts today we are the sole reinsurer. By design, the portfolio has very limited catastrophe exposure. As an underwriter of regional companies we can optimize the geographic diversity across the portfolio. Another key feature of the business is a demonstrated strong client retention rate of 85% or greater. That really reflects our emphasis on building strong relationships with our clients that are based on a mutual respect and mutual benefit.

We truly believe that we’re not successful if our clients are not successful and our model is to help clients grow and prosper. We believe that under the Maiden platform we’ll be able to successfully maintain a high retention rate. We’ve had great feedback from our existing clients to date as well as our partners in the broker community.

Finally, the portfolio’s demonstrated history of producing profitable underwriting results, in fact, since the formation of the GMAC RE platform, the wholly owned platform in 90, the company has consistently developed positive net income. Keep in mind that during this period the industry endured some of the most significant losses in its history beginning with Hurricane Andrew in ’92, the San Francisco Earthquake, the World Trade Center in 2001, Katrina in 2005 and most recently Hurricane Ike.

I think that does reflect the focus of the portfolio on stable, [inaudible] sense of business. Again, by design the portfolio is structured to mitigate volatility. If I could ask you to move on to chart 4, importantly with the addition of the GMAC RE infrastructure Maiden will be very uniquely positioned for growth, increased income and profitability. The GMAC portfolio and underwriting infrastructure have been developed over the last 25 years. In the US GMAC RE has developed a strong and favorable reputation as we believe one of the premier regional reinsurers. A very critical component of the GMAC RE infrastructure is the very strong technology platform that we’ve built comprised of both partner developed and proprietary software tools.

The company’s built an exceptionally strong real-time management information reporting system that provides access to active performance management tools. We have the capability to view ultimate performance at a client level in specific detail. Our system also permits us to understand the business in a very granular way and that allows us to provide much more distinctive products and services to the reinsurance market and most importantly to maintain a very active performance management of the business.

Within the GMAC RE infrastructure we have a team of reinsurance professionals with very strong technical expertise in underwritings, claims, actuarial and risk management. That really we believe is one of the key differentiators for our business.

Our staff has accumulated significant experience within GMAC RE and at many of the more significant participants in the reinsurance sector. We have a great strong diverse workforce and we have a very high employee retention rate which from our perspective ensures continuity with our clients and most importantly accountability for the business. I think it’s fair to say we have employees that have been with us over multiple market cycles which certainly reinforces our collective view of the need for discipline as we underwrite the business.

The acquisition is extremely complimentary to Maiden’s existing infrastructure with really little or no overlapping elements today. Another unique facet of the GMAC RE business is that in the regional treaty segment we do have dual distribution capabilities. The direct distribution platform specifically targets clients that have a strong demonstrated preference for the direct distribution model while our broker channel focuses on providing high quality reinsurance solutions to our broker partners and their clients.

In the aggregate, these and other capabilities we believe position Maiden for continued expansion and significant success in the future.

So if I could ask you to flip to chart 5, this is an overview of the four major business segments that comprise the GMAC RE business. Our largest segment represents approximately 63% of the portfolio in gross revenue and that targets reinsurers in the US. The typical client operates in a multi-state region of the country with strong distribution and targeted products and services. Typically our clients underwrite standard lines such as auto, boat, commercial and personal lines, homeowners, commercial [inaudible], workers’ compensation. We do de-emphasize the more esoteric the more volatile lines of business.

Our average exposed per risk program is $2 million with attachments generally within the first $2 million of exposure. Contracts are underwritten on both a pro rata and excess basis but in the excess are we tend to focus on the areas where again there’s predictability and actuarial credibility in pricing, what we like to refer to as the working layer programs. The business again is produced through reinsurance intermediary relationships and carefully targeted direct distribution that’s again focused on companies with the preference for direct distribution.

The specialty portfolio which is the second segment of the business focuses on two segments, individual risk facultative casualty and our automatic facultative program business. The individual certificate portfolio or the individual certificate facultative casualty business is the only segment of the portfolio that is oriented towards larger stock companies. It represents a smaller portion of the total specialty portfolio. The participations are excess of loss within buffered layers of attachment focusing as in all other segments of predictable layers.

Our accident and health portfolio targets insurers and carefully selected managing general underwriters, many regional in scope, that underwrite medical stop loss and personal accident. Our limits are generally within a million dollars with the vast majority of the accounts written on a pro rata basis. This business again is developed through the intermediary channel.

Finally, our SRS or strategic risk solutions business targets commercial real estate, habitational manufacturing and service related property risks. Coverage is excess property with average net exposed limits of $5 million. The predominant focus is on risks where fire is the primary exposure. Distribution again here is dominantly through brokers and wholesalers.

So that’s a quick snapshot of the overall business.

If I could take you to chart 6, this chart essentially reflects the size of each component relative to the overall portfolio with treaty regional business representing 63%, accident and health representing 18% of the portfolio, specialty at 14%, and SRS at 5%. From a geographic perspective I mentioned the fact earlier that we have the ability to carefully select and build the portfolio to ensure that we have a diverse portfolio of customers. No single state represents more than 20% of the treaty portfolio and it is a very diverse portfolio on balance.

As Barry had mentioned, the GMAC RE leadership team is now among the Maiden RE leadership team. As I mentioned I most recently led the GMAC insurance group, have over 30 years of experience in the insurance industry and reinsurance industry, and prior to becoming the President of GMAC as I mentioned earlier I was responsible for many years for working with the team to develop the reinsurance business.

John Marshaleck who’s here with me today has over 30 years of insurance industry experience and has been President of GMAC RE since 2007. Prior to that time John was Chief Operating Officer and even previously Chief Financial Officer. He has over 20 years of leadership responsibility at GMAC RE. He is joining as President of Maiden RE. John has a wealth of technical skills in addition to being a CPA.

Karen Schmitt has most recently been named Chief Operating Officer of GMAC RE. She will be Chief Operating Officer of Maiden RE. She’s been with GMAC RE for over 10 years now and brings exceptionally strong industry experience as well as very strong technical expertise. She is a fellow of the Casualty Actuary Society and prior to her role as Chief Operating Officer served as Chief Actuary of the company.

Beyond the three of us there are a wealth of skill and capability across the organization with a very strong leadership team, strong technical credentials and broad experience across the reinsurance and the insurance industry. Most importantly there’s been very little turnover in the management ranks which ensures as I said earlier continuity of focus and shared accountability for performance. Most of our leaders today have been with us again through multiple cycles and are again strong advocates of disciplined underwriting.

If I could refer you now to chart 8, the new Maiden Holdings team combines the existing Maiden team and of course the business and infrastructure of GMAC RE which was developed over 25 years. As a result we believe that Maiden has dramatically accelerated its operating plan by acquiring GMAC RE and the existing portfolio while at the same time and importantly maintaining the highly profitable and core AmTrust portfolio.

The assumption of the existing portfolio from GMAC RE generates a significant additional asset base of approximately $1 billion which certainly strengthens the earnings run rate of the business. The assumed portfolio has been carefully and conservatively reserved by GMAC RE actuaries. Across the portfolio measured over the last five years reserving volatility has been negligible on a quarter-to-quarter basis.

The market and client reaction has been outstanding and we believe the combined Maiden Holdings is well positioned for continued profitable growth. We’ve also already experienced some good growth in the fourth quarter with significant count added to the portfolio.

There are a number of preliminary indicators as well that suggest that a market turn may be upon us. I’m sure everyone has looked at the financial conditions of a number of participants in the insurance and reinsurance industry. We think there’s a significant possibility of an increase in demand as well as a reduction in overall capacity. Assuming these indicators hold and frankly under any circumstances, we believe that Maiden should be a very strong participant in an improving market. Going forward the business is expected to generate in excess of $1 billion in revenue with a targeted combined ratio of 96%.

We think that Maiden RE is well positioned as a significant focused global specialty reinsurer with an expanding footprint and client base, and again the business we’re targeting returns in excess of 50% with low volatility. Barry mentioned the fact that it’s a fairly unique element of the reinsurance business in terms of a specialization and low volatility business.

The next chart is an initial snapshot of estimated financial results for 2009. It really sort of aggregates the two portfolios. The premium written for 2009 is expected to be about $1.2 billion, earned premium of $950 million, combined ratio we believe comfortably at a 96% combined, an average of invested assets of $2 billion with an anticipated investment yield of 5.5%. We believe that in our first year of operations the effective tax rate will be at around 5% and our pre-tax earnings for 2009 we expect to be in the range of $150 million.

Just reinforcing the power of the acquisition and the joining of the two organizations and obviously the earnings power as well.

Barry has already talked about the investment portfolio if you look at chart 10. He’s talked about the investment portfolio as it stands at the end of the third quarter. In addition we referenced the fact that we’ve assumed a significant loss portfolio transfer from GMAC insurance and that brings the total asset base to $1.7 billion. 78% of that portfolio is in fixed maturities, 78% are AAA US government and agency. [Inaudible] strong to put it in position with over $400 million of cash and cash equivalents and corporate fixed maturities are 22% of the overall fixed maturities with 93% of the corporate fixed rated A or better.

Again a very strong balance sheet in a turbulent time but I think again positions the company to continue to grow with a strong and additionally developing balance sheet.

Going to chart 11, I think it’s fair to say that both GMAC RE and Maiden have maintained an almost identical vision for their respective businesses. Simply put, our combined vision is to become the premier global preferred provider of customized reinsurance solutions and services for regional and specialty insurers.

We believe very strongly that operating in the reinsurance sector as a specialist is superior to a broad generalist model. We also believe that as a specialist we can deliver differentiated value to our customers. That has been our model to date and that is also Maiden’s model. That focus has also permitted us to grow the business to serve the needs of our customers more effectively and to develop strong operating returns and stable operating performance.

We believe that Maiden is very uniquely positioned as likely the only Bermuda reinsurer with over $1 billion of revenue and are focused on non-catastrophe regional and specialty clients. I would also point out that we’ve maintained a very close relationship with A.M. Best and a very cooperative one, and they have confirmed Maiden’s A- rating following the transaction and the continued focus of Maiden will be on a longer-term basis to grow the balance sheet and obviously work with A.M. Best to increase the rating of the company.

Again we’ve talked about the differentiated strategy. I think that in comparison to other market participants the strategy is quite unique. While there are strong and capable competitors across the industry, our strategy and area of concentration focuses really on select niche segments, the largest being the regional market which is also a desirable segment for many competitors but few have a dominant focus around the segment.

What we find appealing about the segment from an underwriting perspective and a relationship perspective is that for regional and specialty insurers’ reinsurance is a very critical form of their capitalization. That critical need creates a continuity of demand and lends itself to strong relationships and frankly differentiated service space opportunities to provide reinsurance solutions to a target client base.

In developing a regional portfolio we emphasize as I’ve said many times the more predictable and lower severity segments of our client reinsurance programs. These typically provide clients with the greatest level of capital support. With a regional orientation again we can carefully diversify the portfolio by geography and by line of business and today the overall portfolio reflects such diversification.

The company targets significant relationships with our targeted clients that maximize both efficiency and strengthen the depth of the relationship. I think we have a fairly strong client retention rate as I’ve mentioned before as evidence of that relationship.

I think the other important point for us has been the need to maintain a highly efficient operating platform. It’s fair to say that the reinsurance sector like many elements of the insurance industry is in a fairly mature market state in North America. So we do believe that operating efficiency is a critical competitive requirement. Early on in the formation of the business we invested significantly in technology that provides us the ability to operate we believe at a much more efficient level than many of our market competitors without undermining the required technical competency and skills of the business.

Finally, reinforcing that point is that we think that at the end of the day our commitment to our clients, most importantly our commitment to our shareholders is to maintain a disciplined technical underwriting approach for the business. At the end of the day we’re very excited about the opportunity as I’ve said before. There’s certainly a possibility that the market is moving towards a change. We think we’re very well positioned and look forward to future calls with the group.

I’d like to now turn it over to Barry to discuss chart 12.

Barry D. Zyskind

It’s tough to give a little bit of update on the rights offering. As you know we mentioned in the press release that in order to raise capital to support the business we were going to be doing a rights offering. We looked at the options out there in the market place today and the difficult financial markets and we realized that the way to go which we believe was fair to all shareholders and gave all shareholders the opportunity was to do a rights offering and therefore that’s the path we’ve chosen.

The founding shareholders, Michael and George Karfunkel, have agreed to backstop the offering. We chose their confidence and our confidence in how great this is for Maiden long term. We will also give investors the opportunity to oversubscribe in the rights offering so if someone doesn’t take up the rights offering, other shareholders that want to buy more will have the right to oversubscribe.

In terms of timing we are putting together the historical pro forma financials which has to be audited and we will be filing with the SEC hopefully within the next few weeks. Then the record date for the rights offering will be after we file with the SEC.

With that I’d like to turn it back to the moderator to open up the call for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bijan Moazami - Friedman, Billings, Ramsey & Co.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Barry, when do you need to have that capital based on your discussions with the rating agencies?

Barry D. Zyskind

In our discussions with the rating agencies we shared with them that the capital has been committed by the backstops so we’re going through the process and we shared that with them. As soon as it gets done, it’ll get done but the fact that the capital commitment is there is considered the capital is in place.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Regarding the investment portfolios, you guys borrowed in the GMAC RE market $260 million. Do you expect to continue to be doing that going forward or should we expect a lower level of leverage going forward?

Barry Zyskind

I think if you look at what the combined capital is projected next year $800 and with the profitability it could be over $900. I think we were not planning to take it up. We’ll leave it at the current levels and we think that’s a very conservative level and the difference between where we borrow and where you can make on the short term now allows us to if that changes we have enough liquidity and we have enough assets that we could just pay it down very quickly.

So we want to keep it at a very low level where you make some money but there’s no risk to where you can’t pay it back quickly. That’s what we make sure to do. But we don’t see it going up from the levels where it is now.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

So the 5.5% yield projections that you gave us, is it based on the levered or unlevered asset base?

Barry D. Zyskind

Unlevered.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Quickly could you explain a little bit what was the story about the hedge fund liquidation and receiving 966,000 shares of Maiden?

Barry D. Zyskind

If you remember, Maiden really did not have a lot of equity exposure. The only equity exposure it had was it invested in a hedge fund, invested $10 million. The hedge fund that had financial difficulty was liquidating closing down and rather than take back the cash we decided the hedge fund did own Maiden shares to give us the opportunity. We knew the book value was approximately over $8, that there was a much better way to recoup our money by taking back the stock rather than taking back cash so that’s what happened. In the liquidation process instead of taking cash we took the stock and we returned it and we retired it to treasury.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

And the initial investment was $10 million?

Barry D. Zyskind

In the impairments this quarter besides the Washington Mutual and Lehman is the full impairment of that down to the market value.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Very quickly, what is the composition of asset base of GMAC RE that was transferred to you?

Barry D. Zyskind

It was approximately $960 million, of it $410 million approximately was cash and the remaining was around $550 million which was all agency AAA bonds, most of them being very short term.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

No corporate bonds in there?

Barry D. Zyskind

No corporate bonds at all.

Operator

Our next question comes from Dan Schlemmer – Fox-Pitt Kelton.

Dan Schlemmer – Fox-Pitt Kelton

The difference between the $100 million purchase price and the $260 that you’re raising, what’s that $160 differential, what’s the purpose of that? Is that just to support the current business or support growth or just general? What made you come up with $260 as the right number for the raise?

Barry D. Zyskind

That’s the right number. The money will be going in to support the business. Obviously, when you bring on the portfolio $550 million plus the growth of the AmTrust business going through it’s putting the money in to support the business. Obviously, from the presentation and the pre-tax numbers Art share with you, we feel very confident about the profitability will continue to fund the business for the gross.

The money is being raised to put in to the company to support the one-time pick up of a significant portfolio of the liabilities and of writing the business and then the business will really fund itself through being highly profitable going forward.

Dan Schlemmer – Fox-Pitt Kelton

I guess the question is as it comes over, you’re paying $100 million for the company, is there not enough capital in there to support the writings on a go forward basis? Is that why you need the extra $160 or is there a specific reason why? I’m just trying to understand what the $160 if for over and above what’s coming over?

Barry D. Zyskind

Just understand we did a renewal rights, we assumed liabilities, we did renewal rights on the book of business. We did not take over a company with assets in it so we didn’t buy book value Dan. So, we’re putting the equity in. If you would have looked at what the equity was at GMAC RE to support it, we just have to put the equity in to support the business. But, we didn’t buy a company that had equity in it.

Dan Schlemmer – Fox-Pitt Kelton

Then separately sort of forward-looking, maybe too forward-looking as you’re still working through this acquisition, what’s the forward view for the business once this transaction is completed. You sort of have two major businesses. And, do you have an appetite for continuing to acquire organic growth or just how do you view the forward business plan once this is completed?

Art Rushbaum

Certainly we think the prospects for the business related to organic growth are quite significant. I think that the market opportunities are strong. I mentioned earlier some of the overhang challenge that sort of some of the headlines have affected the business. With those gone, we think there’s a strong opportunity to grow organically.

Beyond that, I do think there may be opportunities to add additional platforms as we develop the business. No eminent plans but I think we have to look carefully. One area that I think we need to spend some time on is really continuing to grow our non-US, our international business and that will be one area of focus quite early on here.

Barry D. Zyskind

If I could just add, obviously Dan if there are opportunities that arise, being the fact that the marketplace is shaky and there are opportunities and we think we can acquire them and it makes sense and it fits with what we like, predictable, low volatile accretive acquisitions that can be done and we feel we could raise additional capital, then we will do it.

But, right now I think we have a major business, a very profitable business, a solid balance sheet and I think we have a lot to look forward to and we think ’09 will be a great year. So right now we’re going to focus on just doing the transition very well and growing the business profitably.

Dan Schlemmer – Fox-Pitt Kelton

Last question, can you just talk a little bit about the loss reserves that were brought over? How did you get comfortable on the adequacy there and maybe what’s your take on the amount of risk involved in the $750 million?

Barry D. Zyskind

From my standpoint I’ll just answer it and then I’ll give it back over to Art. We hired one of the major actuarial firms that actually looked at the book a few years before when one of the private equity investors invested heavily and was very familiar with the book of business. They did an expensive due diligence, went through the reserves. We hired another actuarial firm as well to double check their work and we feel very, very comfortable with the reserves based on all of the different actuaries looking at it.

But, more importantly, if you look at the volatility which Art mentioned in his presentation, this book has very, very little movement. If you look at the volatility and the reserves, it’s been almost no movement for several years now which shows you they get it right. They have added 120 people that we hired to have over 14 actuaries, every team has actuaries.

It’s very actuarial driven and if you were to see the information we looked at I think you would have been very, very comfortable with the low volatility, low movement book of business, consistency and the actuarial reports. We felt it was very good and we feel that it was low risk and on the contrary we think it’s very conservatively reserved.

Art Rushbaum

I couldn’t have said it better myself. I guess I would add to that, that the GMAC RE insurance balance sheet, one of the focuses was to maintain absolutely strong and impeccable loss reserves and there was a very disciplined process not only within GMAC RE but at the corporate level to ensure that. I think Barry’s point is absolutely right, the systems controls and process are all about getting it right.

I mentioned earlier the ability to more granularly look at the business. When we look at all of our key accounts we establish independent [IB&R]for each of our client relationships, we do a full actuarial evaluation of every piece of business on a quarterly basis and we react and in addition the operating performance of the business drives future pricing decisions. It’s a very integrated process all focused on really getting the balance sheet right and generating stable returns.

Operator

Our next question comes from Kenneth Billingsley – Signal Hill Group, LLC.

Kenneth Billingsley – Signal Hill Group, LLC

Just a couple of questions on employee count, there’s about 120 employees coming over, is that correct?

Art Rushbaum

That’s correct.

Kenneth Billingsley – Signal Hill Group, LLC

And how many employees total will be at the new combined Maiden Holdings?

Barry D. Zyskind

Probably about 130.

Kenneth Billingsley – Signal Hill Group, LLC

Could you talk about when you look at the combined ratio performance between what you’re predicting and what Maiden was doing before where should we see the bigger differences between the operations of existing Maiden business which is dominated by a lot of [AFSI] premiums and the new GMAC business? Is it in the wash ratio or is it in the expense ratio?

Art Rushbaum

I guess while they’re complimentary businesses recognize that the Amtrust transaction itself creates an enormous amount of efficiencies in the Maiden portfolio today. We’re bringing a significant number of customer relationships over. We think it’s a complimentary efficient portfolio as well and I think at the end of the day if you look at sort of the resources that are focused on developing the business, every account is priced to a combined ratio standard and our targeted return on the aggregate on the business is 50% return on equity.

In some segments of the business the combined ratio may be closer than 100 and other segments it may be lower than 100 depending on the characteristics of the portfolio.

Barry D. Zyskind

Ken, if I could just add when we look at it I think the loss ratio on their business is a little higher, expense ratio is lower and that’s why when you looked at the presentation that Art did we’re projecting 96 which we think is very conservative when you combine the books of business but 96 is what we’re projecting right now. We think we can beat it but 96 or better.

Kenneth Billingsley – Signal Hill Group, LLC

On pricing in general, the comment was made I believe by Art a little bit earlier about how the 2009 market may shape up with some better pricing and there’s been some talk on the street about how the reinsures may be driving some of that rate increase. With the GMAC business did you guys have plans for rate increases for early renewals in 2009? Or, are you in a wait and see approach kind of waiting to see what your competitors do?

Barry D. Zyskind

I think a couple of things to recognize, is I think that our client relationships are long term. We have many clients that we’ve had for over a decade and we’ve really in many cases I would say have been successful at sort of decommoditizing the relationship so that market effect that we don’t pass on to our customers if we are getting what we believe is an appropriate return for the business and that’s really our driver.

Now, with respect to our clients and the affect of a hardening market, they do enjoy strengthening pricing which obviously affects our actual assumed premium so we find that in hardening markets our performance grows from that perspective. In addition to that, new business is I think a tremendous opportunity to the extent that there is going to be increasing demand for the business. Clearly, we’re going to get the rate right to generate the targeted returns in excess of 15%.

Kenneth Billingsley – Signal Hill Group, LLC

You think you’re going to have increased demand because the capital is going to dry up from some of your competitors?

Barry D. Zyskind

Yes, that’s certainly a potential outcome and that’s a theory a lot of people are putting forth. I tend to be always skeptical until I actually see it happening. But, as you start to see third quarter results come in and we are seeing some indications of client needs for additional reassurance support so we’re certainly well positioned to take full advantage of it.

The other area where we benefit significantly from the change in the market is an increase in facilitated demand. We’re starting to see some evidence of that increased demand in our facilitative individual certificate activity.

Kenneth Billingsley – Signal Hill Group, LLC

So it would be safe to say that GMAC business personally did not need rate increases to support their ongoing operations so organic growth will likely just come from your customers are raising their prices?

Barry D. Zyskind

And, new customer relationships in the market place. I mean we certainly feel that we have a good, clean strong balance sheet, top for the market and we’re certainly prepared to grow the business with the right kind of clients and the right kind of relationships. For us, parting markets represent great opportunities to expand our customer base and also to increase the size of programs.

What happens with weakening balance is demand for reinsurance grows as you know. So, it’s really a combination of factors.

Operator

This concludes our questions at this time. Mr. Turin I’ll turn the call back over to you for any additional or closing remarks.

Ben Turin

Thank you very much for joining.

Operator

This concludes today’s conference. We thank you for your participation. Have a nice day.

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Source: Maiden Holdings, Ltd. Q3 2008 Earnings Call Transcript
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