Maiden Holdings, Ltd. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; year-to-date figures cover the nine months ended September 30, 2014. Financial statements are unaudited. Amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context
Maiden is a Bermuda-based reinsurer serving regional and specialty insurers. Its reportable segments are Diversified Reinsurance and AmTrust Reinsurance. The company moved its run-off NGHC quota-share business and remaining E&S business into “Other” for segment reporting and reclassified comparative periods.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Gross premiums written | $622.9m | $491.9m | $1,905.3m | $1,742.1m |
| Net premiums earned | $592.4m | $508.1m | $1,643.6m | $1,509.8m |
| Net income | $33.9m | $25.0m | $67.9m | $76.5m |
| Net income attributable to common shareholders | $27.8m | $21.9m | $49.5m | $67.1m |
| Combined ratio | 97.8% | 97.6% | 97.8% | 97.6% |
| Operating cash flow | Not presented quarterly | $507.0m | $359.3m |
- Q3 underwriting income was $18.3m, compared with $15.2m. Net investment income rose 27% to $29.5m.
- For the first nine months, underwriting income was $48.6m versus $47.4m. Operating earnings, a non-GAAP measure, were $83.1m versus $64.2m; operating earnings per common share were $1.14 versus $0.88.
- At September 30, total assets were $5.060bn, total investments $3.462bn, total equity $1.214bn, and loss and loss adjustment reserves $2.157bn. Common book value per share was $12.33, up from $11.14 at year-end 2013.
- Cash and cash equivalents were $52.4m, with restricted cash of $220.8m. Restricted cash and investments held as collateral totaled $2.781bn. The filing notes that collateral assets support reinsurance obligations and are not freely available for general use.
- Senior notes totaled $360m; junior subordinated debt was repaid in January 2014. Debt to total capital resources fell to 22.9% from 30.2% at December 31, 2013.
Material changes versus comparable periods
- Q3 net income increased 35.5%; nine-month net income declined 11.2%, principally because repayment of junior subordinated debt generated a one-time, non-cash $28.2m accelerated amortization and issuance-cost charge. Management reported nine-month net income would have been $96.1m before that charge.
- Premium growth was led by AmTrust Reinsurance: segment net premiums written grew 48.6% in Q3 and 31.5% year to date. Diversified Reinsurance net premiums written grew 16.9% and 15.6%, respectively.
- Overall combined ratio was nearly unchanged. AmTrust’s Q3 combined ratio was 95.5%; Diversified Reinsurance’s rose to 99.0%, reflecting elevated property losses earlier in the year and modest commercial auto reserve deterioration in Q3.
- Net investment income increased 29.5% year to date, reflecting higher average invested assets and a higher average book yield. Net unrealized investment gains contributed to a $61.4m increase in other comprehensive income for the nine-month period.
- Cash and cash equivalents declined $87.5m over the nine months. Operating cash flow increased, while investing and financing outflows included greater collateral requirements, investment purchases, the debt repayment, and dividends.
Outlook, commentary, risks, and unusual items
- Management cited intense reinsurance competition and residual pricing pressure, while stating it would maintain disciplined underwriting and decline business that does not meet its standards. No specific earnings or revenue guidance was provided.
- Management’s long-term target is 15% average operating return on common equity; year-to-date 2014 operating return was 13.0%. Management expected cash-flow benefits from AmTrust growth to continue into the remainder of 2014 and 2015.
- On November 5, 2014, the board authorized a common dividend of $0.13 per share, payable January 15, 2015, up from the $0.11 quarterly dividend declared in July. Series A and Series B preference dividends were also authorized.
- Investment risks include interest-rate sensitivity, mortgage-backed securities exposure, credit risk, and foreign currency exposure. A hypothetical 100-basis-point rate increase was estimated to reduce shareholders’ equity by 13.8%; a 10% U.S. dollar strengthening was estimated to reduce net assets by $6.0m. No currency hedges were in force at quarter-end.
- One corporate bond was recognized as other-than-temporarily impaired, producing a $1.2m charge. Other securities’ unrealized losses were attributed primarily to credit-spread widening; management said it did not intend to sell those securities and expected contractual amounts to be collected.
- Related-party exposure is significant: AmTrust-related balances include a $168.0m loan to AII and substantial collateral arrangements. The AmTrust quota-share agreement was extended through July 1, 2016, with automatic successive three-year renewals unless terminated as specified.
- A former executive’s whistleblower-related claim remained in administrative proceedings; the hearing began in September 2014 and was expected to conclude in the first half of 2015. The company said it considers the claim without merit and is defending it. Management reported no other material change in commitments, contingencies, or risk factors.
Important facts for investors to verify
- Whether premium growth—particularly the expanding AmTrust-related business—continues without weakening underwriting discipline or increasing counterparty concentration.
- Loss-reserve development, especially commercial auto deterioration and the effect of elevated property losses on Diversified Reinsurance.
- The quality and liquidity of collateralized assets, the collectability and terms of the related-party loan, and the scale of AmTrust-related balances and transactions.
- How interest rates, mortgage-backed security prepayments, credit spreads, and foreign exchange movements affect investment income, book value, and capital.
- The impact of preference dividends and the debt-repurchase charge on common-shareholder earnings, and progress toward management’s 15% operating-return target.
- Developments in the former executive’s claim and the timing and outcome of the administrative hearing.