Maiden Holdings, Ltd. quarterly report, Q3 FY2017

Maiden Holdings, Ltd. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial amounts below are rounded to millions unless noted.

Business context

Maiden is a Bermuda-based reinsurer with Diversified Reinsurance and AmTrust Reinsurance segments. Its AmTrust business represents substantial counterparty and premium concentration: AmTrust accounted for 69.7% of gross premiums written in the first nine months of 2017.

Financial performance

MetricQ3 2017Q3 2016Nine months 2017Nine months 2016
Total revenue$703.0m$738.2m$2,214.1m$2,072.3m
Net premiums earned$653.9m$698.3m$2,074.5m$1,951.9m
Net income (loss)$(55.1)m$40.8m$(44.9)m$117.5m
Net income (loss) attributable to common shareholders$(63.6)m$31.8m$(65.5)m$90.0m
Basic loss (earnings) per common share$(0.74)$0.42$(0.76)$1.20
Underwriting income (loss)$(82.4)m$17.4m$(116.5)m$46.7m
Combined ratio114.1%98.5%106.7%98.7%
Net investment income$40.8m$35.7m$123.5m$107.3m
Operating cash flowNot stated for quarterNot stated for quarter$374.8m$326.2m

The quarterly and year-to-date underwriting losses drove the decline in earnings. Net loss and loss adjustment expenses were $536.0m for Q3 and $1,545.2m year to date. The nine-month net loss ratio was 74.2% and the expense ratio was 32.5%, producing a 106.7% combined ratio. Management’s non-GAAP operating loss attributable to common shareholders was $56.4m for Q3 and $46.2m year to date, versus operating earnings of $30.2m and $87.0m in the comparable 2016 periods.

Balance sheet, debt and liquidity

  • At September 30, 2017, total assets were $6,839.1m, total liabilities $5,417.7m and total equity $1,421.4m.
  • Investments were $5,010.0m; cash and cash equivalents were $182.7m, with a further $131.6m of restricted cash. Total investments and cash, including restricted balances, were $5,324.3m.
  • Loss and LAE reserves were $3,365.0m, up $468.5m from December 31, 2016. Unearned premiums were $1,601.1m.
  • Senior notes principal was $262.5m, down $100.0m after redemption of the 2012 notes. Total capital resources were $1,683.5m, and debt was 15.6% of capital resources, compared with 21.0% at year-end 2016.
  • Operating cash flow was $374.8m; investing activities used $212.1m and financing activities used $28.4m during the first nine months. Cash and cash equivalents rose $136.9m to $182.7m.
  • Management said current liquidity sources were adequate for the next 12 months. However, $4,860.8m of cash and investments were restricted or held as collateral, representing 90.8% of fixed-maturity investments and cash, including restricted cash.
  • Common book value per share was $11.30, down from $12.12 at December 31, 2016. Total shareholders’ equity included $465.0m of preference shares.

Material changes and management commentary

  • Adverse prior-year loss development was $77.7m in Q3 and $150.5m year to date, compared with $12.4m and $41.9m in the 2016 periods. The largest year-to-date component was AmTrust Reinsurance, at $100.9m; elevated general liability, auto liability and workers’ compensation losses were cited.
  • Q3 estimates included $20.0m of losses from Hurricanes Harvey and Irma: $15.0m in Diversified Reinsurance and $5.0m in AmTrust Reinsurance. Maiden expected no losses from Hurricane Maria or the Mexico earthquakes. Estimates remained preliminary.
  • Excluding prior-year development and catastrophe losses, management reported higher current-year loss ratios than in 2016, reflecting increased initial loss picks in both operating segments based on market conditions and recent loss experience.
  • Net premiums written declined 10.6% in Q3, mainly due to lower AmTrust premiums, but rose 3.2% year to date. Management attributed the quarterly AmTrust reduction to program mix, slower organic growth and underwriting actions; Diversified premiums grew.
  • Net investment income rose 14.5% in Q3 and 15.1% year to date. Management cited larger average invested assets, higher average yields and income from called securities.
  • Management’s long-term target is 15% operating return on average common equity. It said underwriting initiatives could support progress toward that target over the next 12–24 months; the filing provides no specific earnings or revenue guidance. Management also said catastrophe losses could contribute to improved market pricing, particularly in property lines.
  • Maiden issued $150.0m of Series D preference shares, with net proceeds of $144.9m, and used part of the proceeds to redeem $100.0m of senior notes. It repurchased 2.0m common shares in Q3 at an average $7.11 per share; $85.7m remained authorized at quarter-end.

Risks, contingencies and unusual items

  • Reserve development and estimation remain central risks: adverse development materially increased, and ultimate catastrophe claims were not yet known.
  • AmTrust concentration is significant: it generated 69.7% of year-to-date gross premiums written. The filing also describes substantial collateral arrangements and related-party transactions with AmTrust.
  • The company reported $12.2m of foreign-exchange losses year to date and had no hedging instruments in force at September 30. S&P affirmed the operating subsidiaries’ BBB+ rating but changed the outlook to negative; A.M. Best’s A rating had a stable outlook.
  • Interest-rate sensitivity is material: the filing estimates a 100-basis-point increase would reduce AFS fixed-maturity fair value by $170.0m and shareholders’ equity by 12.0%, before other effects.
  • A former executive’s whistleblower-related employment claim remained pending; the company said it considered the claim without merit and expected hearings to conclude in late 2017 or early 2018.
  • The company reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements. Management stated disclosure controls were effective.

Important facts for investors to verify

  • Whether subsequent actuarial reviews confirm or increase the $150.5m of year-to-date adverse reserve development, particularly in AmTrust general liability, auto and workers’ compensation.
  • How the $20.0m catastrophe estimate develops and whether the company’s net exposure changes as claims mature.
  • Whether AmTrust’s loss experience, premium mix and program termination affect future recoveries, collateral requirements or the continuing related-party relationship.
  • Whether underwriting results improve toward management’s 15% long-term operating ROACE target, given the 106.7% year-to-date combined ratio and higher current-year loss picks.
  • How restricted collateral, foreign-exchange exposure, investment-market movements and the negative S&P outlook affect usable liquidity and capital strength.