Maiden Holdings, Ltd. quarterly report, Q3 FY2015

Vollständiges Dokument

Maiden Holdings, Ltd. — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015. Maiden is a Bermuda-based reinsurer with Diversified Reinsurance and AmTrust Reinsurance segments. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.

Financial results and position

  • Revenue: Q3 total revenue was $693.7 million, up 11.3% from $623.5 million; nine-month revenue was $1.952 billion, up 12.2% from $1.739 billion. Net premiums earned increased 11.2% in Q3 and 12.3% year to date.
  • Profit: Q3 net income was $28.5 million versus $33.9 million; income attributable to common shareholders was $22.5 million versus $27.8 million, or $0.31 versus $0.38 per basic share. Nine-month net income was $93.6 million versus $67.9 million; common-shareholder income was $75.4 million versus $49.5 million, or $1.03 versus $0.68 per basic share. The prior-year nine-month comparison includes a nonrecurring $28.2 million debt-related charge.
  • Operating earnings: Maiden’s non-GAAP operating earnings attributable to common shareholders were $25.8 million in Q3 versus $29.3 million and $80.8 million for nine months versus $83.1 million. Operating ROACE was 11.3% for Q3 and 11.8% year to date, below management’s stated long-term 15% target.
  • Underwriting and margins: Underwriting income fell to $9.1 million in Q3 from $19.2 million and to $36.5 million for nine months from $51.5 million. The consolidated combined ratio worsened to 99.6% in Q3 and 99.1% year to date, from 97.8% in both comparable periods. Diversified Reinsurance’s ratios were 104.0% for Q3 and 103.1% year to date; AmTrust Reinsurance’s were 95.5% and 95.1%.
  • Investment results: Net investment income rose 11.3% in Q3 to $32.8 million and 12.6% year to date to $96.3 million. Average book yield eased to 3.0% from 3.1%. Investment-related unrealized losses contributed to a $72.3 million year-to-date decline in other comprehensive income.
  • Cash flow: Nine-month operating cash flow was $525.4 million versus $507.0 million. Investing activities used $470.7 million and financing activities used $43.8 million. Cash and cash equivalents ended at $117.6 million, with restricted cash of $315.5 million.
  • Balance sheet and capital: Total assets were $5.757 billion, up 11.5% from year-end 2014; loss reserves were $2.538 billion, up 11.8%, and unearned premiums were $1.440 billion, up 19.2%. Total liabilities were $4.535 billion and total equity $1.222 billion. Senior notes remained $360 million; debt was 22.8% of total capital resources of $1.580 billion. Maiden shareholders’ equity was $1.220 billion, while common book value per share declined 3.2% to $12.28.

Material changes versus prior periods

  • AmTrust Reinsurance drove growth: nine-month net premiums written rose 20.9% to $1.423 billion and earned premiums rose 28.9% to $1.275 billion. Its underwriting income increased to $62.0 million from $43.5 million.
  • Diversified Reinsurance contracted: nine-month net premiums written fell 11.6% to $602.7 million and earned premiums fell 10.2% to $570.7 million. The segment recorded an underwriting loss of $17.8 million versus income of $13.4 million.
  • Management attributed weaker underwriting to adverse development in U.S. excess commercial auto, higher-than-expected catastrophe losses in Diversified Reinsurance, and adverse development in run-off business, particularly the former NGHC quota share. These pressures were partly offset by AmTrust growth and higher investment income.
  • In Q3, Maiden designated approximately $608.7 million of corporate bonds as held-to-maturity. The AFS portfolio’s fair value declined $168.4 million from year-end, reflecting purchases, maturities, the reclassification and market-value changes.

Outlook, risks and unusual items

  • The filing provides no specific earnings, premium or combined-ratio guidance. Management cited continued competitive pricing pressure, stated it would maintain disciplined underwriting, and said it was positioned to benefit if market pricing improves. Cash flows from AmTrust growth typically lag at least one quarter; management anticipated further cash-flow benefits in the remainder of 2015.
  • Market risks include interest-rate, credit and foreign-currency exposure. The company reported no currency hedges in force; a 10% or 20% strengthening of the U.S. dollar against non-U.S. currencies was estimated to reduce net assets by $6.1 million or $12.2 million, respectively. A hypothetical 100-basis-point rate increase was estimated to reduce shareholders’ equity by 12.2% through AFS valuation effects.
  • Approximately 88.3% of fixed maturities and restricted cash were pledged or otherwise held as collateral at September 30. The company also reported substantial related-party reinsurance and collateral arrangements, including a $168.0 million loan to a related party and about $2.339 billion of trust collateral for AmTrust obligations.
  • The AmTrust quota-share agreement automatically renewed on October 1, 2015 through June 30, 2019, with unchanged terms. AmTrust represented 70.2% of nine-month net premiums written, making the relationship and related-party exposures material to monitor.
  • The company recognized $1.1 million of investment impairment in 2015 relating to one corporate bond. It identified 197 securities in unrealized-loss positions, with aggregate unrealized losses of $84.9 million; management stated these were generally temporary except for the identified credit impairment.
  • Management reported no material changes to previously disclosed commitments, contingencies or risk factors. A former executive’s whistleblower claim remained in administrative proceedings, with a hearing expected to conclude in 2016; the company said it considers the claim without merit and is defending it.
  • After quarter-end, the board declared a $0.14 common-share dividend payable January 15, 2016. The filing also reports a $0.13 quarterly common dividend authorized in July and paid in October.

Most important facts for investors to verify

  1. Whether adverse development in U.S. commercial auto and run-off business continues, and whether reserve estimates remain adequate.
  2. Whether AmTrust-led growth can sustain underwriting profitability, cash generation and the company’s high related-party concentration.
  3. The development of the combined ratio, especially Diversified Reinsurance’s above-100% results and higher acquisition expense ratios.
  4. Investment portfolio valuation, credit quality, unrealized losses, interest-rate sensitivity and the implications of designating securities as held-to-maturity.
  5. Liquidity and collateral availability, including restrictions on subsidiary distributions, related-party trust collateral and the related-party loan.
  6. Whether operating returns move toward management’s 15% long-term ROACE target; this filing does not provide quantified forward guidance.