Maiden Holdings, Ltd. — Q1 2013 Form 10-Q
Business context and reporting period. Bermuda-based reinsurer reporting the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Its three segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share. Financial statements are unaudited and prepared under U.S. GAAP.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Gross premiums written | $714.7 million | $613.2 million |
| Net premiums written | $689.1 million | $590.8 million |
| Net premiums earned | $488.4 million | $438.5 million |
| Total revenue | $518.9 million | $463.1 million |
| Net income attributable to Maiden common shareholders | $25.0 million; diluted EPS $0.34 | $20.4 million; diluted EPS $0.28 |
| Operating earnings, non-GAAP | $21.1 million; diluted operating EPS $0.29 | $19.4 million; diluted operating EPS $0.27 |
| Net investment income | $22.0 million | $18.4 million |
| Net cash from operating activities | $16.2 million | $71.2 million |
Underwriting income was $15.0 million versus $12.1 million. The consolidated combined ratio improved to 97.5% from 97.9%; below 100% indicates underwriting profitability. The loss and loss adjustment expense ratio rose to 67.8% from 65.0%, while the acquisition expense ratio fell to 26.8% from 29.8%.
At March 31, 2013, total assets were $4.42 billion, total liabilities $3.39 billion and total equity $1.03 billion. Common shareholders’ equity was $876.3 million and book value per common share was $12.10, compared with $11.96 at December 31, 2012. Total debt was $333.8 million: $207.5 million senior notes and $126.3 million junior subordinated debt. Debt was 24.5% of total capital resources, down from 24.7% at year-end.
Cash and cash equivalents were $103.8 million, while restricted cash and investments totaled $2.08 billion, largely held as collateral for reinsurance obligations. Operating cash flow declined year over year; management attributed this to timing of cash flows from premium growth and $16.7 million of Superstorm Sandy loss payments. Cash increased by $22.2 million during the quarter to $103.8 million.
Material changes and segment performance
- Net premiums written increased 16.6%, principally from AmTrust Quota Share growth of 52.6% to $344.8 million. Diversified Reinsurance declined 7.2% to $267.6 million; ACAC was broadly flat at $76.6 million.
- AmTrust generated $9.0 million underwriting income, with a 95.9% combined ratio versus 95.5%. Its premium growth reflected AmTrust acquisition activity, organic growth and improved rates, particularly in workers’ compensation.
- Diversified Reinsurance generated $5.1 million underwriting income versus $2.2 million; its combined ratio improved to 97.5% from 98.9%, despite a higher loss ratio, as acquisition expenses declined.
- ACAC underwriting income declined to $0.8 million from $2.4 million, and its combined ratio worsened to 98.8% from 96.4%, reflecting weaker physical-damage underwriting and adverse development on prior years.
- Net investment income rose 19.2% as average invested assets increased 20.3% to $3.05 billion; average book yield remained 2.9%. Net realized and unrealized investment gains were $3.3 million versus $1.4 million.
- Other comprehensive income was a loss of $8.0 million, compared with income of $26.8 million, mainly reflecting a decline in unrealized investment gains. Fixed maturities had $132.6 million of net unrealized gains at quarter-end, down from $143.5 million at year-end.
Outlook, risks and unusual items
- Outlook: The filing gives no numerical earnings or premium guidance. Management described a highly competitive reinsurance market and limited pricing improvement at January 1 and April 1 renewals. It said it would continue to decline business that does not meet underwriting standards and believed it was positioned to benefit if pricing improves.
- Investment environment: Management expects historically low interest rates to pressure industry investment income. Faster prepayments on mortgage-backed securities increase premium amortization and may constrain or reduce investment income. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $102.1 million and shareholders’ equity by 9.9%; a 100-basis-point decrease was estimated to increase them by $105.8 million and 10.3%, respectively.
- Catastrophe exposure: Estimated ultimate Superstorm Sandy losses remained $31.1 million at March 31, 2013, unchanged from year-end. Reinsurance recoverable on unpaid losses was $118.1 million, including $68.2 million related to Sandy.
- Portfolio and market risks: 98.5% of fixed-income investments were investment grade; 25.3% were rated BBB. The company reported no investment impairment in the quarter. It had no foreign-exchange hedges; a 10% or 20% strengthening of the U.S. dollar was estimated to reduce net assets by $9.4 million or $18.7 million, respectively.
- Concentration and liquidity: The company has substantial related-party business with AmTrust and a $168.0 million loan to AmTrust’s reinsurer, plus significant collateral arrangements. Subsidiary dividends are subject to regulatory and solvency restrictions; no dividends were paid by the specified operating subsidiaries in the quarter. Management did not anticipate restrictions materially affecting normal operations or common dividends.
- Contracts and business change: A March 2013 amendment extended the AmTrust quota-share agreement to July 1, 2016, set a 31% ceding commission for most covered business and added a loss-sharing corridor for specified Specialty Program business. In April, Maiden announced a temporary 100% quota share of its excess-and-surplus property business with Brit, to transition to Brit assuming renewal rights; existing business would run off. The transaction was effective May 1, 2013, after quarter-end.
- Debt and dividends: Junior subordinated debt carries a 14% coupon. Repayment before January 20, 2014 could trigger an additional $21.4 million expense, as well as write-off of $26.2 million of unamortized discount. Common dividends declared were $0.09 per share; Series A preference dividends were $3.1 million for the quarter.
- Contingency: A former executive’s whistleblower complaint was remanded to an administrative law judge on procedural grounds in March 2013. The company disputes the claim and is defending it.
Important facts for investors to verify
- Whether premium growth, particularly in the AmTrust segment, translates into cash flow and remains profitable under the amended contract terms.
- Loss-reserve development, including Sandy claims and ACAC physical-damage business, and the collectability and timing of related reinsurance recoverables.
- How low yields, mortgage prepayments, credit spreads and interest-rate movements affect investment income, portfolio fair value and equity.
- The credit, collateral and counterparty exposure associated with AmTrust-related balances, the $168.0 million related-party loan and restricted assets.
- The execution and financial effects of the Brit transaction and run-off of Maiden’s existing excess-and-surplus property business.
- Potential outcomes of the remanded whistleblower proceeding and any resulting financial exposure.