Maiden Holdings, Ltd. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. Maiden is a Bermuda-based reinsurer operating through Diversified Reinsurance and AmTrust Reinsurance.
Financial performance and position
- Q2 revenue and earnings: Total revenues were $647.1 million, up 14.9% year over year. Net income was $26.5 million, down 16.9%; net income attributable to common shareholders was $20.5 million, or $0.28 basic and $0.27 diluted EPS, versus $25.8 million and $0.35/$0.34 a year earlier.
- First-half results: Net premiums earned were $1,186.7 million, up 12.9%; net income was $65.0 million versus $34.0 million; common-shareholder net income was $52.9 million, or $0.72 basic and $0.69 diluted EPS. The comparison benefited from a $28.2 million noncash debt-discount and issuance-cost charge recorded in H1 2014. Excluding identified items, management-reported operating earnings attributable to common shareholders were $55.0 million versus $53.7 million.
- Premiums and underwriting: Q2 gross premiums written were $674.2 million, up 20.4%; net premiums written were $629.6 million, up 16.4%. Q2 underwriting income declined to $10.9 million from $15.7 million. The combined ratio worsened to 99.2% from 98.0% (below 100% indicates underwriting profit). H1 underwriting income was $27.4 million versus $32.1 million; the combined ratio was 98.7% versus 97.8%.
- Segments: Q2 AmTrust Reinsurance underwriting income rose to $20.6 million from $14.0 million, with a 95.2% combined ratio. Diversified Reinsurance recorded a $7.8 million underwriting loss versus $4.8 million income, with a 104.1% combined ratio. AmTrust supplied 77% of Q2 net premiums written.
- Investment income and portfolio: Q2 net investment income increased 25.1% to $35.2 million; H1 rose 13.3% to $63.4 million. At June 30, investments were $3,836.2 million. The portfolio’s unrealized investment losses reduced H1 other comprehensive income by $54.4 million after tax; Maiden reported no other-than-temporary impairment.
- Cash flow: H1 operating cash flow was $377.8 million, versus $235.5 million. Investing activities used $398.8 million, primarily as the company bought fixed maturities; financing activities used $28.6 million, including dividends. Cash and cash equivalents ended at $57.4 million, down from $108.1 million at year-end. Restricted cash was a further $251.7 million.
- Balance sheet, debt, and capital: Total assets were $5,664.1 million and total liabilities $4,438.4 million. Loss reserves were $2,459.3 million, up 8.3% from year-end; unearned premiums were $1,483.9 million, up 22.9%. Senior notes remained $360.0 million. Total capital resources were $1,583.7 million; debt was 22.7% of total capital resources. Book value per common share was $12.35, down 2.7% from December 31, 2014, mainly reflecting lower accumulated other comprehensive income.
- Dividends: The Q2 common dividend was $0.13 per share, compared with $0.11 a year earlier. A $0.13 common dividend for Q3 was subsequently authorized, payable October 15, 2015.
Material changes and management commentary
- Premium growth was driven by AmTrust’s acquisitions and organic expansion. Diversified Reinsurance premiums declined, reflecting a lost U.S. customer, weaker European auto business, foreign-exchange effects, and a new retrocessional quota share effective January 1, 2015.
- Management attributed weaker underwriting results chiefly to higher U.S. excess commercial auto claims; first-quarter large losses in U.K. and German auto business also weighed on Diversified Reinsurance. AmTrust’s loss ratio improved, particularly in U.S. workers’ compensation.
- Management stated that competition and pricing pressure remained significant, while emphasizing disciplined underwriting and a willingness to decline business that does not meet its standards. It identified a long-term target of 15% average operating return on common equity; actual annualized operating return was 12.2% for Q2 and 12.1% for H1.
- The company said its cash levels were within target ranges and that it expected further cash-flow benefits from AmTrust growth in the remainder of 2015. The filing provides no specific earnings or premium guidance.
Risks, contingencies, and unusual items
- Related-party exposure: AmTrust-related business is a substantial share of premiums and involves material commissions, collateral arrangements, and a $168.0 million loan to a related party. The principal AmTrust quota-share agreement is scheduled through July 1, 2016, subject to renewal and termination provisions.
- Market and currency risk: The $3.8 billion available-for-sale fixed-maturity portfolio is exposed to interest-rate and credit-spread changes. A hypothetical 100-basis-point rate increase was estimated to reduce portfolio fair value by $187.0 million and shareholders’ equity by 15.3%. The company had no foreign-exchange hedges in force; a 10% strengthening of the U.S. dollar against its non-U.S. currencies was estimated to reduce net assets by $7.1 million.
- Claims and reserves: Results remain sensitive to claims severity, reserve estimates, inflation, and loss development, including excess commercial auto and European auto claims. Loss reserves increased during the half-year.
- Collateral and liquidity: $3.4 billion of cash and investments was restricted or pledged as collateral at June 30, 2015, limiting the freely available portion of reported assets.
- Legal matter: The company continued to defend a former executive’s whistleblower-related claim, remanded for administrative proceedings; management said it considered the claim without merit. It reported no material changes to previously disclosed commitments, contingencies, or risk factors.
- Rating: On July 27, 2015, S&P changed the company’s and subsidiaries’ outlook from negative to stable and affirmed their financial strength ratings.
Important facts for investors to verify
- Whether AmTrust-related growth, concentration, collateral requirements, and related-party transactions remain acceptable and supportable.
- Whether excess commercial auto and European auto claims develop as expected, and whether reserve increases are adequate.
- How much of the decline in book value and equity reflects temporary market movements versus changes in underlying credit quality; monitor interest rates, spreads, and currency movements.
- Whether operating cash flow converts into unrestricted liquidity, given the scale of restricted assets and the timing of premium and claims cash flows.
- How management-reported operating earnings reconcile to GAAP results and whether the 15% long-term operating-return target is achieved.