Maiden Holdings, Ltd. — 2014 Form 10-K Summary
Business context and reporting period
Maiden is a Bermuda-based reinsurer serving regional and specialty insurers, primarily in the U.S. and Europe. It focuses on quota-share and other relatively predictable, lower-volatility business. The report covers the fiscal year ended December 31, 2014; figures below are in U.S. dollars unless stated otherwise. The two reportable segments are Diversified Reinsurance and AmTrust Reinsurance.
AmTrust remained the largest client, representing 64.2% of gross premiums written. The NGHC quota share and remaining excess-and-surplus business were in run-off and reported together as “Other.”
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Gross premiums written | $2,507.4 million | $2,204.2 million |
| Net premiums written | $2,458.1 million | $2,096.3 million |
| Net premiums earned | $2,251.7 million | $2,000.9 million |
| Total revenues | $2,381.2 million | $2,110.1 million |
| Net income | $101.5 million | $102.9 million |
| Net income attributable to common shareholders | $77.1 million | $87.9 million |
| Basic / diluted EPS | $1.06 / $1.04 | $1.21 / $1.18 |
| Operating earnings attributable to common shareholders (non-GAAP) | $117.7 million | $87.5 million |
| Net cash provided by operating activities | $651.6 million | $366.2 million |
| Combined ratio | 98.0% | 97.5% |
For Q4 2014, net income attributable to common shareholders was $27.5 million and basic and diluted EPS were each $0.38; Q4 2013 common income was $20.8 million and EPS was $0.29.
Net investment income rose 28.3% to $117.2 million, supported by 19.0% growth in average invested assets and a higher average book yield (3.1% versus 2.8%). Underwriting income was $61.8 million, down from $63.9 million. The consolidated combined ratio remained below 100%, indicating underwriting profitability, but worsened year over year. The expense ratio increased to 31.9% from 30.5%, while the loss ratio improved to 66.1% from 67.0%.
At year-end, total assets were $5.16 billion, total liabilities $3.92 billion, and total Maiden shareholders’ equity $1.24 billion. Senior notes totaled $360 million; the remaining junior subordinated debt was repaid in January 2014. Total capital resources were $1.60 billion and debt was 22.5% of total capital resources, down from 30.2%. Cash and cash equivalents were $108.1 million, with a further $284.4 million restricted; investments were $3.47 billion. Approximately $3.12 billion of cash and investments was pledged as collateral, limiting its availability for general use.
Gross loss and loss adjustment expense reserves were $2.27 billion, including $1.02 billion of IBNR reserves. The company recorded $18.8 million of net adverse prior-year reserve development, compared with $1.4 million favorable development in 2013. Operating cash flow increased substantially; investing activities used $471.9 million and financing activities used $208.3 million, including debt repayment and shareholder dividends.
Material changes versus the prior period
- Net premiums written grew 17.3%, led by AmTrust Reinsurance, up 37.7%; Diversified Reinsurance grew 11.4%.
- Common-shareholder GAAP income fell 12.3%, despite higher operating earnings. The main reported drag was a $28.2 million non-cash charge for accelerated amortization and write-off of costs on the repaid junior subordinated debt.
- Excluding that charge, management reported common-shareholder net income increased 19.8%. Lower interest expense and stronger investment income helped; higher preference-share dividends and weaker run-off results offset some gains.
- Book value per common share rose to $12.69 from $11.14. Book value plus accumulated dividends increased 15.6%, with higher investment-related accumulated comprehensive income contributing materially.
- Restricted cash and investments increased to $3.12 billion from $2.23 billion, primarily reflecting collateral supporting growth in AmTrust business.
Outlook, commentary, risks, and unusual items
Management targets 10% business growth in 2015 and a long-term operating return on average common equity of 15%; 2014 operating ROACE was 13.6%. Management said it expects progress toward its return target over the following 12 to 24 months, citing the lower cost of capital after the junior debt redemption and underwriting initiatives. These are targets, not guarantees.
Effective January 1, 2015, Maiden entered into a retrocessional quota-share agreement with a highly rated reinsurer. Management expects it to be earnings-accretive and to provide $150 million to $200 million of additional capital capacity. The AmTrust quota-share agreement was extended through July 1, 2016, subject to termination provisions.
- Concentration and related-party exposure: AmTrust generated 64.2% of 2014 gross premiums written. Shared founding shareholders, related-party transactions, collateral arrangements, and a $168.0 million loan to a related party are relevant governance and counterparty considerations.
- Reserving uncertainty: Management’s sensitivity analysis indicated reserves after reinsurance recoverables could increase by approximately $54.4 million in Diversified Reinsurance and $165.1 million in AmTrust Reinsurance under the described alternative loss-ratio scenarios. Estimates depend on cedant reporting and actuarial assumptions.
- Competition and underwriting: Management reported competitive pricing pressure, including in higher-frequency, lower-severity business. It said it would decline business that does not meet underwriting standards.
- Investment, liquidity, and currency risks: The portfolio is interest-rate sensitive; a hypothetical 100-basis-point rise in rates was estimated to reduce shareholders’ equity by 12.5%. The company had no currency hedges at year-end. Regulatory collateral and dividend restrictions also constrain access to some assets and subsidiary cash.
- Ratings and regulatory risks: Operating subsidiaries were rated A- with a positive outlook by A.M. Best and BBB+ with a negative outlook by S&P. A downgrade could impair competitiveness or trigger contractual consequences.
- Unusual items and contingency: The company recognized $2.4 million of investment impairment on one corporate bond. A former executive’s whistleblower claim was in administrative proceedings; the company said it believed the claim was without merit and expected the hearing to conclude in the first half of 2015.
- Dividends: The board raised the common dividend to $0.13 quarterly. Payments remain discretionary and subject to preference-share priority, legal, regulatory, and capital constraints.
Important facts for investors to verify
- Whether growth and underwriting performance remain profitable as AmTrust’s share of premiums rises and market pricing remains competitive.
- Subsequent reserve development, especially in long-tail business, personal auto, commercial auto, and the run-off portfolio; compare actual development with the disclosed sensitivities.
- Whether the 2015 retrocessional agreement delivers the expected capital support and earnings contribution, including its terms and counterparty strength.
- Availability of liquidity after collateral commitments, subsidiary dividend restrictions, debt service, and preference-share dividends.
- Progress toward the 15% operating ROACE target and reconciliation of non-GAAP operating earnings to GAAP results.
- Developments in the executive whistleblower proceeding, AmTrust-related exposures, and the subsidiaries’ credit ratings.